There’s a reason why Warren Buffett is revered as one of the wealthiest men in the world. He’s mastered the ability to grow his wealth while making strategic and tax efficient moves. His most recent move in charitable donations is a perfect example.
It was announced earlier this year that Buffett, chairman of Berkshire Hathaway, Inc., pledged to donate his shares--worth approximately $3.6 billion--to five charities. This is part of his plan to donate over 99% of his fortune to charitable foundations. In addition to continuing his worldwide philanthropic efforts, making a stock donation rather than writing a check will prove to have significant tax benefits to both Buffett and the various benefactor organizations.
Why it’s better to donate stock rather than cash
When a person donates stock held for greater than one year, the donor’s charitable deduction is based on the fair market value of the stock. In other words, Buffett will get credit for the stocks’ appreciated value at the time of donation rather than what he paid for them (aka his cost basis). Buffett’s tax savings will be greater because additionally, he will not have to pay tax on the gain (the difference between the fair market value and his cost basis). If instead he sold the shares and gave the proceeds to charity, he would pay tax on the realized capital gain. Let’s take a look at a scaled-down example.
Stock vs. Cash Donation
You purchased stock over a year ago for $10,000 and it now has a fair market value of $50,000.
- You have a 40% combined federal and state tax rate on your income
- All gains are subject to the maximum federal long-term capital gains tax rate of 20%
As you can see, it is more tax efficient to donate stock instead of cash. Additionally, if the benefactor charity decides to sell the stock, generally no taxes will be paid on the gain.
This strategy of charitable giving is a win-win for both parties. Should you decide to give to charity in the future, discuss stock versus cash donations with your tax advisor to see which makes the most sense for your particular facts and circumstances.
Buffet’s simple, but effective, charitable giving strategy maximizes the value received by the charity, while minimizing or eliminating the taxes to be paid. Contact The Tax Warriors® at Drucker & Scaccetti for effective and tax efficient strategies for philanthropic giving. We are always prepared to help you with wealth transfer planning or any other tax or financial matter.