How giving away some winning stocks can help cut taxes and balance your portfolio

Published Wed, Nov 29 20232:52 PM ESTUpdated Wed, Nov 29 20233:40 PM EST

In a year when the major stock averages are touting healthy gains, investors may be unwilling to part with their favorite companies – but giving away some of those winners could pay off. The S & P 500 is up more than 18% in 2023, and the Nasdaq Composite is boasting a 36% gain. Just a handful of tech giants, such as Meta Platforms , Nvidia and Tesla , are driving much of those gains. That also means that if you've been carrying positions in those names, you could end up with some overconcentration. But rather than just selling out of those stocks to help dilute those holdings, consider donating a few shares to charity. "Given the runup in a lot of stocks, a lot of investors don't want to sell them because of the gain," said Barry Glassman, a certified financial planner and founder of Glassman Wealth Services in North Bethesda, Maryland. But giving some away cuts the size of the position in a portfolio and skirts capital gains taxes. "This is a great way to consider reducing the holding while getting a tax benefit as well," said Glassman, who is also a member of CNBC's Financial Advisor Council. Brenna McLoughlin, CFP and senior advisor at Wealthstream Advisors in New York, has been discussing this very issue with a client who has positions in Nvidia and Eli Lilly. Those stocks are up more than 200% and 62%, respectively, this year, and are good candidates for some charitable giving, she said. "Any of those seven [stocks that are driving the S & P 500's gains] are prime for giving," McLoughlin added, referring to the so-called Magnificent Seven of Meta, Nvidia and Tesla, plus Apple , Microsoft , Alphabet and Amazon . Investors are encouraged to get to know the charitable giving deduction. This break is available to taxpayers with itemized deductions that exceed the standard deduction of $13,850 in 2023, if single, and $27,700 if married, filing jointly. Giving pays Donors' tendency is to give cash to their favorite charities, particularly during this time of year. However, an outright donation of appreciated stock could be a more tax-efficient way to do a good deed. That's because if you were to sell your stock to generate cash, you'd be subject to a capital gains tax on the appreciation. If you donate an asset that you've held for more than a year and you itemize deductions on your taxes, you can generally deduct its fair market value. There are limits to how much you can claim in a given year. If you're donating stock to a public charity, you're capped at a deduction of up to 30% of your adjusted gross income. "Cash is the easiest, but not the most efficient way to give," said Tim Steffen, certified public accountant and director of advanced planning, private wealth management at Baird in Milwaukee. "By giving $10,000 in stock versus $10,000 in cash, you're making a capital gain go away." Finding the right winners for giving To get the greatest benefit from charitable giving, investors should be sure to donate holdings with a lower tax basis – that is, your original investment in the asset. These are holdings with the largest unrealized gain, which would otherwise generate a hefty tax bill if you were to sell those positions. You can also do this with mutual funds if you have multiple tax lots. "You can give your broker or advisor instructions," said Steffen. "Be specific and tell them to give away the shares you bought on that particular date with this basis." Investors can also simplify their charitable giving by making direct gifts of appreciated assets to a donor-advised fund. These accounts can receive an array of assets, spanning from cash to stocks and even cryptocurrencies. Investors who contribute to a donor-advised fund can take a charitable deduction right away and spread out their grants as they see fit. "We go into the portfolio, see which position has the largest unrealized gain, and make that contribution to the donor-advised fund," said McLoughlin. Donor-advised funds also make it easy for investors to bunch deductions – meaning they can pile several years' worth of gifts into one year to collect the tax break. "You might make two, three or four years of charitable contributions, give them in 2023 and over the next few years dole out the dollars from the donor-advised fund," said Glassman.