What you can learn from Bill Gates – Maximizing your charitable contribution

By Will Geeslin, CPA

Bill Gates made news this week by making one of the largest charitable donation of the 21st century. This donation, made to the Bill & Melinda Gates Foundation, consists of 64 million shares of Microsoft stock valued at $4.6 billion, which is approximately 5% of Gate’s net worth. What’s interesting to note (besides the incredible amount) is the method in which he made the contribution: stock instead of cash.

Giving to charity in any form is a highly admirable thing to do in and of itself, but there is also a financial benefit to the taxpayer: a tax deduction. This tax benefit can be obtained by donating cash or anything of value (clothes, cars, or $4.6 billion worth of stock). If this is the case, why did Bill Gates donate his shares, rather than sell them and contribute cash to charity? By transferring the shares rather than selling and contributing cash proceeds Bill and Melinda Gates are able to reduce their tax liability for capital gains (good for them), which increases the financial value of the gift (good for the charities).

When a taxpayer is considering giving stock or cash to a charity, there are two things they must evaluate:

1.       The amount of time the shares have been owned

2.       The fair market value of the stock compared to the amount paid for the stock

Shares held for less than a year before donation are only deductible for the amount the taxpayer originally paid for the shares, also known as the basis. Unlike shares held for a short period of time, shares held for longer than one year are deductible for the current market value, which is much more valuable for the taxpayer if the stock has appreciated.

The second factor that must be considered is the share’s fair market value on the date of donation.  Assuming the shares have appreciated and the taxpayer has held the shares for more than a year, it will typically be more beneficial to donate the shares instead of selling them and donating the proceeds.

So, what are the tax implications of donating shares verse cash from the sale of stock? In the example below we compare the consequences of when a taxpayer donates shares versus the proceeds of the sale of the same shares:

 We will assume the taxpayer purchased shares of stock five years ago for $2,000 and the shares are worth $10,000 (fair market value) on the date of contribution.\

As shown above, when a stock has appreciated in value greater than the original purchase price it is best to donate the stock directly in order to maximize tax savings. By donating the shares instead of selling and donating the cash, the taxpayer has avoided paying an additional $1,200 in long term capital gains taxes. Additionally, if a tax payer were to sell shares and donate the proceeds, they are donating $8,800, net of the tax paid, rather than the full $10,000 value of the shares.

Tax planning strategies like these help people maximize their giving power and minimize their tax base. A plan like this will help save Bill and Melinda Gates millions in capital gains taxes and increase the impact his charitable contribution can have.

If you have any questions regarding tax planning or preparation, please contact Geeslin Group, and follow us on all of our social media channels for other useful content.