Reducing Tax Liability When a Stock Grows in Value

EVERY INVESTOR WANTS to buy stock at $50 per share and watch it grow over time to $500. If you are among those who have enjoyed such an experience, congratulations.

But with that financial success comes two potential problems.

First, the surge in your stock’s value likely creates an imbalance of asset allocation in your overall investment portfolio. Second, selling shares of highly appreciated stock to diversify and rebalance your portfolio exposes you to the unpleasant capital gains tax.

This raises a strategic question: Instead of selling shares of appreciated stock, is there a way to diversify and rebalance your investment portfolio while also minimizing tax liability? For philanthropically minded folks, the answer is a resounding yes.

Option 1: Give Shares of Stock Outright to Charity

You can avoid capital gains tax on appreciated stock by donating shares to a public charity, such as the Indiana University School of Medicine. Simultaneously, you qualify for a tax deduction of the stock’s full fair market value. IU School of Medicine also benefits, because the donation it receives is larger than the amount left over if you had instead sold the stock, paid the tax, and made a gift of the net cash proceeds.

Option 2: Give Shares of Stock to a Life Income Arrangement

You also reduce or eliminate your exposure to capital gains taxes by giving shares of highly appreciated stock to a life-income arrangement at a charity like the School of Medicine. Under that arrangement, the school sells the shares you donated and reinvests the proceeds from the sale. Next, the School of Medicine pays you a stream of fixed or variable stream of income for life. Later, when the life income arrangement terminates, the remaining assets will be used as you had directed, whether it’s to support medical education or medical research.

Option 3: Public Charities Are Not Subject to the Capital Gains Tax

So, if you own shares of highly appreciated stock, consider giving it to the School of Medicine – either outright or to a life income arrangement. When we sell that appreciated stock, we do not have to pay capital gains tax. This allows the School of Medicine to reinvest the full amount into our mission of preparing healers and transforming health.

Making smart stock picks should be rewarding. Giving those stocks to your favorite charity reduces taxes and serves the greater good.

To learn more about giving shares of appreciated stock, please contact Tim W. Ueber, IU School of Medicine’s senior director of planned giving at twueber@iu.edu or (317) 274-0187.