An unintended consequence of the tax overhaul
High-net-worth investors often make philanthropic donations, but changes in the tax law creates a major question regarding their financial benefits.
Nowhere is this more true than in the area of donating stock to charity instead of cash.
Donating appreciated stock to charity offers clients a double benefit, says Monica Dwyer, a CFP and wealth advisor at Harvest Financial Advisors in West Chester, Ohio.
They get the advantage of doing some good by making the donation while also avoiding taxation on the capital gains.
The first benefit will remain.
Indeed, 74% of wealthy investors think that they are having an impact by making a financial contribution to a nonprofit organization, according to the 2017 U.S. Trust Insights on Wealth & Worth survey.
But the second benefit is in question, because of the Tax Cuts and Jobs Act. Under the new law, claiming the deduction for charitable contributions will be more difficult than in the past.
That is because one of the major changes the new tax law brought was a higher standard deduction, which means that clients may find themselves in a situation where they are not itemizing their deductions, a necessary step to glean the benefits of donating stock to charity.
“With the changes in the tax laws, some people are asking, “Well, does it still make sense to donate stock to charity?” says Leyla Morgillo, associate advisor at Madison Financial Planning Group in Syracuse, New York. “We feel that it is still advantageous; you just have to be a little bit more strategic about it.”
But because of the increased standard deduction, “some careful tax planning and strategic planning can help make sure that any charitable contribution that’s done is able to maximize tax benefits, Morgillo says”
When a client is deciding what stock to donate, strategic planning is needed, as consideration should be given to factors including the length of time the stock has been held, how much embedded taxation is associated with the stock, and what concentration the stock represents within the overall portfolio, she says.
“For example, we often recommend clients donate appreciated positions that represent a significant concentration within their portfolio,” Morgillo says.
“Not only is the client able to avoid paying capital gains tax on the stock, but it also helps tackle a portfolio concern — the risk associated with being overly exposed to one company — that was otherwise unable to be addressed due to the tax consequences,” she says. “We often work with clients who have been gifted stock with very low basis and find themselves in this situation.”
Still, some advisors are estimating that the number of people filing for that deduction “is going to go way down because the hurdle is much higher,” Dwyer says.
“There’s this big question about whether or not people are going to decrease the amount of donations they’re making because the tax incentive isn’t going to be there as much,” she says. “If 30% of people were doing an itemized deduction in 2017 and we probably only have about 10% of people that are going to be doing it in 2018, the question becomes are people going to continue to give?”
This story is part of a 30-30 series on tax-advantaged investing.