Stock Donations and Donor Advised Fund
May 21, 2024 13:19:33 GMT -8
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Post by 4aapl on May 21, 2024 13:19:33 GMT -8
If you have non-cash investments that you have held for over a year, such as stock that has appreciated, there are a variety of advantageous ways to make donations with them while maximizing the tax benefit.
This article does a good job of presenting a couple different situations for long term stock donations: www.schwabcharitable.org/tax-2024
A few years ago a couple friends both talked of the benefits of a Donor Advised Fund, or DAF. Basically you transfer long term shares into it, and then can make donations to 501c3 nonprofits. This gives you options such as letting you spread donations over years even if funding the DAF in just one year, and lets you donate to a nonprofit even if they aren't set up to accept stock. Psychologically, it also might help by already setting aside funds to donate, and not being tied to the current stock price.
For us, we were getting a decent chunk of one time normal income. Most of our standard income is from dividends or long term capital gains. Due to the favored 0% tax rates on a segment of dividends or LTCG, this made for a strange case where total federal income tax rates on additional income would be nearly 50%. This is because not only would the income be taxed at around 22% or 24%, but it would also push dividends out of the 0% bracket and into the 15%, and some dividends in the 15% bracket up to the 20% bracket. The additional AGI could also cause deductions or other benefits to be limited or removed. There's also the net investment income tax, though this 3.8% addition is calculated from AGI and before standard or itemized deductions, at least for 2023.
Long story short, Turbo Tax showed for each dollar of income, the additional tax was about 48 cents. And while that is a first world problem, since we wanted to make larger donations, it made sense to have about twice as much to give.
So we moved shares with a valuation roughly equal to this extra income to a DAF. Sadly it was near when AAPL was at its low in late December of 2022. But the market was down some at the time too. Shares that went in were sold somewhere around $135, and put into some index fund type choices. And their value has gone up since then. By donating stock, we also didn't have to pay taxes on the capital gains of those shares, where even at this pricing the total would have been about 80% gains, so about 19% net. In total this made for being able to donate around $3 for every $1 we would otherwise have to donate.
This isn't the right choice for everyone, but it seems to have worked pretty well for us. There is an annualized 0.6% fee on assets in the DAF, taken out via fees on the various funds. But the much bigger potential lose is on the difference between the fund options and how the money would do in your account. If AAPL doubled this year (I don't expect that, but using it as an example), but the S&P only went up 10%, that would be a huge difference. Until you get to a pretty large amount in the DAF (like $250k), you can't have individual stocks and instead can select from their ~11 choices. And of those, the riskiest is an S&P fund (followed by a total market fund and a world market fund). It can be said that you wouldn't want risk inside a Donor Advised Fund, but if I plan to have funds in there for 3-5-10 years, or put even more in there that I was slowly donating from over decades, then I'd prefer to have a little more short term risk with a little more likely long term appreciation.
With our DAF, originally it had a minimum donation amount to a charity of $200 or so. I see that is now $50.
The other negative is having to be patient. It takes a little time for a charity to receive a check. This isn't a good solution for giving to a charity that comes to your door (or maybe it is, by making sure it really is a 501c3), or making a small donation while at a high school sporting event. But most places are pretty happy to get a donation, even if it takes a little while. And so even with places that have a time limited option, like a match for donations they get that week, they've been happy to take that "pledge" even if it might take 2.5 weeks for them to get the check and deposit it.
Again, this is isn't the best fit for everyone or every situation. But it seems to have multiplied some of the money we are setting aside for donations, and in really appreciating that these 2 friends helped give us info on a DAF I wanted to keep spreading the information.
Thanks!
This article does a good job of presenting a couple different situations for long term stock donations: www.schwabcharitable.org/tax-2024
A few years ago a couple friends both talked of the benefits of a Donor Advised Fund, or DAF. Basically you transfer long term shares into it, and then can make donations to 501c3 nonprofits. This gives you options such as letting you spread donations over years even if funding the DAF in just one year, and lets you donate to a nonprofit even if they aren't set up to accept stock. Psychologically, it also might help by already setting aside funds to donate, and not being tied to the current stock price.
For us, we were getting a decent chunk of one time normal income. Most of our standard income is from dividends or long term capital gains. Due to the favored 0% tax rates on a segment of dividends or LTCG, this made for a strange case where total federal income tax rates on additional income would be nearly 50%. This is because not only would the income be taxed at around 22% or 24%, but it would also push dividends out of the 0% bracket and into the 15%, and some dividends in the 15% bracket up to the 20% bracket. The additional AGI could also cause deductions or other benefits to be limited or removed. There's also the net investment income tax, though this 3.8% addition is calculated from AGI and before standard or itemized deductions, at least for 2023.
Long story short, Turbo Tax showed for each dollar of income, the additional tax was about 48 cents. And while that is a first world problem, since we wanted to make larger donations, it made sense to have about twice as much to give.
So we moved shares with a valuation roughly equal to this extra income to a DAF. Sadly it was near when AAPL was at its low in late December of 2022. But the market was down some at the time too. Shares that went in were sold somewhere around $135, and put into some index fund type choices. And their value has gone up since then. By donating stock, we also didn't have to pay taxes on the capital gains of those shares, where even at this pricing the total would have been about 80% gains, so about 19% net. In total this made for being able to donate around $3 for every $1 we would otherwise have to donate.
This isn't the right choice for everyone, but it seems to have worked pretty well for us. There is an annualized 0.6% fee on assets in the DAF, taken out via fees on the various funds. But the much bigger potential lose is on the difference between the fund options and how the money would do in your account. If AAPL doubled this year (I don't expect that, but using it as an example), but the S&P only went up 10%, that would be a huge difference. Until you get to a pretty large amount in the DAF (like $250k), you can't have individual stocks and instead can select from their ~11 choices. And of those, the riskiest is an S&P fund (followed by a total market fund and a world market fund). It can be said that you wouldn't want risk inside a Donor Advised Fund, but if I plan to have funds in there for 3-5-10 years, or put even more in there that I was slowly donating from over decades, then I'd prefer to have a little more short term risk with a little more likely long term appreciation.
With our DAF, originally it had a minimum donation amount to a charity of $200 or so. I see that is now $50.
The other negative is having to be patient. It takes a little time for a charity to receive a check. This isn't a good solution for giving to a charity that comes to your door (or maybe it is, by making sure it really is a 501c3), or making a small donation while at a high school sporting event. But most places are pretty happy to get a donation, even if it takes a little while. And so even with places that have a time limited option, like a match for donations they get that week, they've been happy to take that "pledge" even if it might take 2.5 weeks for them to get the check and deposit it.
Again, this is isn't the best fit for everyone or every situation. But it seems to have multiplied some of the money we are setting aside for donations, and in really appreciating that these 2 friends helped give us info on a DAF I wanted to keep spreading the information.
Thanks!