Donating Low-Cost Basis Securities

Donating to charity is a meaningful way to give back, but for Texans, it can also provide significant tax benefits. If you own stocks, mutual funds, or other securities that have grown in value over time, you may want to consider donating them to a donor-advised fund (DAF). This strategy allows Texas residents to maximize their charitable impact while reducing their tax burden. Our Houston, TX probate lawyer who has been with our firm since its founding in 2021 is here to break down why this works and how it can benefit you.

What Are Low-Cost Basis Securities?

Low-cost basis securities are investments that have significantly increased in value since you purchased them. The “cost basis” refers to the original amount you paid for the asset. For example, if you bought a stock for $10 per share years ago and it’s now worth $100 per share, the cost basis is $10, and the appreciation is $90.

If you were to sell these securities, you’d likely have to pay capital gains tax on the $90 of appreciation. While Texas does not have a state income tax, you would still be subject to federal capital gains taxes, which could be as high as 20% depending on your income level and how long you’ve held the asset. This is where the advantages of donating appreciated securities come into play and why it is important for everyone to have estate planning in place no matter their age.

How Donating Securities To A Donor-Advised Fund Works

A donor-advised fund is a charitable giving account that allows you to make a donation, receive an immediate tax deduction, and decide later which charities will benefit. When you donate appreciated securities directly to a DAF, you avoid selling the asset yourself. This means you won’t incur capital gains taxes on the appreciation. Instead, the full market value of the securities can be used for charitable purposes.

Here’s how it works:

1. You transfer the appreciated securities to the DAF.
2. You receive a charitable tax deduction for the fair market value of the securities at the time of the donation.
3. The DAF can sell the securities tax-free and use the proceeds to support your chosen charities over time.

Tax Advantages For Texas Residents

For Texas residents, donating low-cost basis securities to a DAF offers several important tax advantages:

1. Avoid Federal Capital Gains Tax: While Texas residents enjoy the benefit of no state income tax, federal capital gains taxes still apply. By donating appreciated securities directly to a DAF, you completely avoid this tax, which can save you a substantial amount of money if your investments have grown significantly.
2. Receive A Fair Market Value Deduction: When you donate securities to a DAF, you’re eligible for a tax deduction equal to the fair market value of the securities at the time of the donation. This is true even though you never paid taxes on the appreciation. For example, if you donate stock now worth $50,000 that you purchased for $10,000, you can claim a $50,000 deduction on your federal taxes.
3. Maximize Charitable Impact In Texas Communities: Since the DAF can sell the securities without paying taxes, the full value of your donation is available for charitable purposes. This means your chosen charities, including those serving communities in Texas, will receive more funding than if you sold the securities, paid taxes, and donated the remaining cash.
4. Bunching Deductions: With the standard deduction being relatively high, fewer Texans itemize deductions each year. Donating appreciated securities to a DAF allows you to “bunch” your charitable contributions into one year, making it easier to exceed the standard deduction threshold and maximize your federal tax benefits.

Example Scenario For A Texan

Imagine you own 1,000 shares of stock that you purchased for $10 per share. Today, the stock is worth $100 per share, meaning the total value is $100,000, and the appreciation is $90,000. If you sell the stock, you’d owe federal capital gains taxes on the $90,000. At a 20% tax rate, that’s $18,000 in taxes, leaving you with $82,000 to donate.

If you donate the stock directly to a DAF instead, you’ll avoid the $18,000 tax and can claim a $100,000 charitable deduction. Additionally, the DAF can sell the stock without paying taxes, so the full $100,000 is available for charitable giving, potentially supporting Texas-based organizations.

Before Donating

While donating low-cost basis securities to a DAF offers substantial tax advantages, there are some important considerations for Texas residents:

1. Eligible Securities: Most DAFs accept publicly traded securities, but policies on privately held or restricted stock may vary. Check with your DAF provider to confirm what they accept.
2. Timing: To claim the deduction for a specific tax year, the donation must be completed by December 31 of that year. Start the process early to avoid delays.
3. Deduction Limits: The IRS limits charitable deductions to 30% of your adjusted gross income (AGI) for donations of appreciated securities. However, you can carry forward any unused deductions for up to five years.
4. Consult A Tax Professional: Tax rules can be complex, and everyone’s situation is unique. Work with a tax advisor to ensure you’re maximizing the benefits of your donation while staying compliant with federal laws.

Why A Donor-Advised Fund Makes Sense For Texans

A DAF offers flexibility and convenience, which is especially beneficial for Texans who want to support local causes or national charities. You can donate now to secure the tax benefits but take your time deciding which charities to support, including those that address specific needs in Texas. Additionally, the DAF handles the administrative work, such as liquidating the securities and distributing funds to charities, making it an attractive option for donors looking to simplify their giving process.

Donating low-cost basis securities to a donor-advised fund is a smart way for Texans to support the causes they care about while minimizing their tax burden. By avoiding federal capital gains taxes and claiming a deduction for the full market value of your donation, you can maximize the impact of your charitable giving. If you’re considering this strategy, consult with a financial advisor or tax professional to ensure it aligns with your overall financial plan, protects your privacy, and benefits the Texas communities you care about. Stuart Green Law, PLLC has been working on estate plans for families that protect their assets. We are licensed in Texas, Kentucky, Pennsylvania, and South Dakota, so contact us for help today.