On Nov. 28 — aka Giving Tuesday — robo-advisor Betterment will launch a new feature to help investors reap the benefits of giving (donating shares to charity) and receiving (good karma in the form of a tax break).
Betterment Charitable Giving automates the process of donating appreciated shares from a Betterment taxable account to 11 charities within the company’s network.
The free service is in keeping with the playbook robo-advisors — such as Betterment, Wealthfront and Personal Capital — created to help the masses access professional wealth management via automation. High-net-worth individuals have long used this tax-saving strategy; now it’s available to anyone.
You can donate appreciated investments to a charity on your own, but giver beware: It can get involved.
The hassles of tax-smart giving
An individual can donate appreciated investments to a charity without a middleman like Betterment. But giver beware: It can be involved because, well, taxes.
Betterment simplifies the task through automation: Customers indicate how much money they wish to donate and to which cause. Betterment calculates the tax impact, identifies the best investments to donate (those with the most appreciated shares), sells those shares and moves the money into the chosen charity’s Betterment account.
See NerdWallet’s robo-advisor roundup for more on what automated advisory services do for investors.
Give and ye shall receive … a tax break
Besides giving one the warm fuzzies, donating securities to worthy causes lets users:
- Avoid paying capital gains taxes they’d have owed when they sold. In years when the stock market delivers particularly strong returns, investors with taxable accounts can rack up onerous capital gains IOUs due to Uncle Sam when they sell shares. Don’t worry about sticking the charity with the tab — they don’t pay tax.
- Claim a charitable deduction. Giving shares of stock is just like writing a check to support a good cause in the IRS’s book. Both count as deductible gifts and lower your taxable income for the year. The amount eligible for a deduction is based on the value of the stock on the day it was donated.
Receiving funds via Betterment also reduces the administrative burden — and costs — for charities. Because they receive the proceeds of the sale (the cash and not the shares), they avoid the added step of selling stock on their own and calculating the share value at the time of donation for reporting to the IRS.
A few things to keep in mind
Betterment’s assisted giving service removes the hassle of donating stock, but it also takes away some of investors’ choice.
Account holders determine how much money they want to donate, but Betterment determines which shares to sell, and only those that are subject to long-term gains — those held for one year or more — are eligible. (Note that customers are still responsible for itemizing the deductions on their own tax returns when they file. Betterment will provide a detailed itemized receipt for record keeping.)
Another limitation is that investors can donate only to charitable organizations with accounts managed by Betterment. (This enables Betterment to direct-deposit cash from the sale of shares.) Customers can request that a charity be added to Betterment’s platform, but at launch the 11 eligible organizations are:
- UNICEF USA
- Wounded Warriors Family Support
- Hour Children
- Against Malaria Foundation
- Save The Children
- Feeding America
- Big Brothers Big Sisters NYC
- World Wildlife Fund
- Breast Cancer Research Foundation
The Betterment Charitable Giving feature is available only to customers who have a taxable account. Investments held in IRAs aren’t eligible.
The Charitable Giving feature is Betterment’s second offering for socially conscious investors in recent months. Its socially responsible investment portfolio, which uses ETFs composed of companies that support certain social values, was the first. Read our story to learn more about socially responsible investing, also known as values-based or sustainable investing.