Lessons for investors trying to cut their tax bill from Elon Musk's $5.7 billion Tesla stock donation

Published Sun, Feb 20 20227:56 AM ESTUpdated Sun, Feb 20 20229:56 AM EST

Elon Musk has donated a sizable chunk of his Tesla shares to charity, but you don't have to be a billionaire to put a similar concept to use. A recent filing with the Securities and Exchange Commission showed that Musk donated about 5 million shares of Tesla in November, worth around $5.7 billion. The CEO of the electric vehicle company had a busy 2021, selling $16 billion in shares that year. Though the SEC filing doesn't disclose the recipient of the donated shares, the billionaire made a move that could help knock down his tax bill — and it's a move accessible to wealthy investors with realized capital gains in their portfolio. "When ultra-high-net-worth people donate to charity, there are different motivations," said Megan Gorman, managing partner at Chequers Financial Management. "They could be charitable and create a legacy like Bill Gates or they could be reducing their tax bill." Here's how investors can reap the portfolio benefits of charitable giving. Charitable deduction on income taxes Taking a tax break for charitable donations will depend on whether you itemize deductions on your tax return. That means the total of your itemized deductions during 2021 — which you can claim for costs that include mortgage insurance, charitable donations and medical expenses — must exceed the standard deduction of $12,550 if you're single or $25,100 if you're married and filing jointly. A charitable donation of appreciated stock that you've held for at least a year just might be the most tax-smart way to give. This way, you avoid incurring capital gains taxes you'd generate if you sold your holdings and gave away the cash proceeds. A low-cost basis stock — meaning you acquired it when it was very cheap — that's highly appreciated might be the best candidate for giving. "Say you get the stock for $1 a share, and you donate it when it's worth $1,000 a share, you've shielded yourself from paying taxes on $999 of capital gains," Gorman said. Another factor that made charitable giving attractive in 2021 is the S & P 500 's 27% gain last year. Investors who saw their portfolios rise likely had a hard time finding large enough losing positions to offset realized capital gains and cut their tax bills. "Using those donations to charity is a good idea and more so in 2021, given how the market was playing out," Gorman added. Diversify heavy concentrations A side benefit of giving appreciated stock to charity is that you can also dilute a heavy concentration in your portfolio without selling the position – this way, you avoid capital gains taxes, and you can claim a deduction for the donation. "For an average wealthy investor, people are often reluctant to sell those concentrated positions, but charitable giving can be a great way to reduce some exposure and get a deduction for the market value," Baird director of tax planning Tim Steffen said. If you're thinking about claiming a donation you made last year, especially now that we're in the middle of tax season, consider the following: Gather your acknowledgement letters: Charitable organizations send acknowledgement letters to donors, noting the description of the contribution. "You have to keep these letters because the IRS can disallow the deduction without it," Steffen said. "Make sure it's accurate." Be sure to file Form 8283 when you file your taxes: If you claimed a deduction of over $500 for donations of items other than cash, you'll need to submit Form 8283 . You'll have to spell out the details of the fair market value of your gift. Consider streamlining your donations: You can make a tax-deductible donation to a donor-advised fund. Investors can also make grants to their favorite charities from these accounts over time.

Tesla CEO Elon Musk arrives on the red carpet for the Axel Springer Award 2020 in Berlin, Germany, on Dec. 1, 2020.

Britta Pedersen | Getty Images

Elon Musk has donated a sizable chunk of his Tesla shares to charity, but you don't have to be a billionaire to put a similar concept to use.