Tax-Efficient Stock Investing for Charitable Donors

Whitworth, Jeff; McCormack, Joseph
February 2011
Journal of Financial Planning;Feb2011, Vol. 24 Issue 2, p39
Academic Journal
This paper presents a tax-efficient stock investing strategy whereby investors who regularly contribute to charity can earn after-tax returns that on average exceed their pre-tax returns. This is accomplished by realizing tax losses on stocks that have declined, while simultaneously using appreciated stocks in lieu of cash to make planned charitable donations. Expected returns can be increased further by using more volatile stocks to implement this strategy. Risk can be controlled by diversifying across multiple stocks. Diversification does not reduce the strategy's tax benefits because accrued gains on donated stocks are never realized and therefore are not offset against capital losses. The improvement in after-tax returns may be smaller if the investor has some long-term gains in the same year, if the stock incurs a loss exceeding $3,000, and/or if the stock's value grows to an amount larger than the planned charitable donation. Even in these cases. however, the investor's expected return will be higher as a result of implementing this tax-efficient stock investing strategy.


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