Donating to charity isn’t the big tax write-off it used to be. Not since the 2017 Tax Cuts and Jobs Act watered down the charitable tax deduction.
But altruistic investors such as yourself have another tax-saving option at your disposal: donating shares. In this article, we’ll walk you through:
- How donating and replacing shares resets their tax bill
- How pairing the strategy with tax loss harvesting can plus-up the savings
- How we make it all easier to pull off than your favorite video game cheat code.
How donating and replacing shares resets their tax bill
Let’s start with a couple prerequisites up front:
- You can only donate appreciated shares, meaning ones that have gained in value.
- We require that you’ve held them for at least a year to maximize the tax savings.
- You can only donate shares from a taxable investing account.
That means tax-advantaged accounts such as 401(k)s and IRAs—with one exception that’s neither here nor there—are off the table. So if you’d like to start leveraging this tax strategy, you’ll need to first open and fund a taxable investing account. You can even give it a name like “Giving fund” and contribute to it solely for this purpose.
Give your giving a leg up
Similar to the mechanics of tax loss harvesting, donating shares lowers your taxes thanks to a little something called cost basis. Cost basis is the price you pay for a share. It’s how the IRS calculates the profits (i.e. capital gains) on your investing, and by extension your capital gains tax owed.
By donating and—most importantly—replacing shares, you’re resetting the cost basis of that slice of your investing. So a share that had increased in value by say, 20%, suddenly becomes, in the eyes of the IRS, a share that hasn’t appreciated at all.
It’s as if all the gains to that point never happened.
Don’t worry; the gains are still very much there. And you’re wealthier for it. But the taxes owed if or when you ultimately liquidate those investments will be lower than if you had never donated.
How adding tax loss harvesting can plus-up the savings
Tax loss harvesting (TLH) helps you defer taxes down the road, freeing up more cash to invest now. In exchange for the tax break today, a share that’s sold or “harvested” for a loss and replaced carries a lower cost basis and higher future tax bill. It’s like handing Uncle Sam an IOU come tax time.
But guess what happens when you donate a share that was originally part of a harvest?
You erase its entire tax bill up to that point—TLH IOU and all.
It’s one of the few ways you can avoid paying taxes altogether on some of your investing. So it’s no wonder why this combo move has long been a favorite of wealthy investors.
Now, thanks to technology like ours, it’s never been easier for everyday investors to do right while reaping the rewards.
How we make it easy to donate shares
Before tech like ours lowered the bar, donating shares required several steps, things like tracking down the charity’s brokerage information, figuring out which shares to give, and filling out the necessary forms.
But with Betterment, it’s as easy as logging in on a desktop browser and making a few clicks. We show you exactly how much of your taxable investing is eligible to donate, and we don’t charge any processing fees, meaning your entire donation goes directly to the charity you support.
Whether you’re doing it for the tax break, or doing it for the sake of doing good, we’re dedicated to making the process a simple one.
