Donating Appreciated Stocks to Charities
While there are numerous ways to contribute, donating appreciated stocks (stocks that have gone up in price from what you paid) to charities is a strategy that offers significant financial benefits for both the donor and the receiving organization. In this blog post, we will explore the ins and outs of this powerful form of charitable giving.
This article is part of a series on the different charitable giving strategies: The Comprehensive Guide to Charitable Strategies – Gilbert Wealth
The Basics of Donating Appreciated Stocks
When you donate appreciated stocks to a qualified charitable organization, you transfer ownership of the stocks to the charity. This act can have several financial advantages over conventional cash donations. Here’s how it works:
1. Capital Gains Tax Benefits
One of the most compelling reasons to donate appreciated stocks is the tax benefits. When you sell appreciated stock, you are typically subject to capital gains tax on the profit you’ve earned. However, when you donate these stocks directly to a charity, you can potentially eliminate the capital gains tax you would have owed had you sold the stocks yourself. This can result in substantial savings and maximize the value of your donation.
2. Income Tax Deductions
In addition to avoiding capital gains tax, you can also claim a charitable tax deduction for the full fair market value of the donated stocks, provided you itemize your deductions on your tax return. This further reduces your taxable income for the year, potentially lowering your overall tax liability.
3. Supporting Causes You Care About
Donating appreciated stocks allows you to support charitable causes that matter to you while making a more substantial impact. In fact, donating appreciated stocks can result in even more money for the charity to use. The charity benefits from your donation, and you benefit from the tax advantages. It’s a win-win scenario.
Example of Donating Appreciated Stock vs Cash
You purchased a stock for $1,000. You hit the jackpot and the current value of your stock now is $50,000.
Selling and Donating Cash
You decide to sell the stock and donate the cash.
- You sell the stock for $50,000, realizing a capital gain of $49,000 ($50,000 – $1,000).
- You are liable to pay taxes on the capital gain. Assuming a tax rate of 15%, you owe approximately $7,350 in taxes ($49,000 * 0.15).
- Now, your net amount available for donation is $50,000 – $7,350 = $42,650.
- You donate $42,625 to a charity.
- You can deduct this $42,625 donation from your taxable income, potentially saving you on income taxes. Assuming a tax rate of 15%, this would result in tax savings of approximately $6,394 ($42,625 * 0.15).
Donating Appreciated Stocks
Instead of selling the stock, you decide to donate the entire position to a charity.
- You purchased Tesla stock for $1,000.
- The current value of your Tesla stock is $50,000.
- Instead of selling the stock, you decide to donate the entire position to a charity.
- By donating appreciated shares, you can deduct the full value of the stock, which is $50,000, from your taxable income.
This results in potential tax savings of approximately $7,500 ($50,000 * 0.15) because you are not required to pay capital gains tax on the $49,000 gain.
Differences in Value
| Selling and Donating Cash | Donating Appreciated Shares |
Amount to Charity | $42,625 | $50,000 |
Impact to Tax Bill | $956 Owed | $7,500 Saved |
The Process of Donating Appreciated Stocks
To donate appreciated stocks to a charity, follow these general steps:
1. Identify a Qualified Charity
Ensure that the charity you want to support is a qualified organization eligible to receive tax-deductible contributions. Confirm their tax-exempt status with the IRS or your country’s equivalent agency.
2. Contact the Charity
Reach out to the charity to discuss the donation process. They will likely have specific instructions and requirements for accepting stock donations. If they do not, the process for them is fairly easy. They can establish a non-profit brokerage account with either an investment custodian, such as Charles Schwab or Fidelity, or even with their bank if investment services are offered. Once the account is established, they can provide you with the information for transfer.
Alternatively, you can use a Donor Advised Fund as the recipient of the donated stock. Check out this article for more information: Charitable Giving through a Donor Advised Fund – Gilbert Wealth
3. Determine the Stock’s Value
The value of the donated stocks is usually based on the average between the highest and lowest trading prices on the date of the transfer. Your brokerage can help you determine this value.
4. Initiate the Transfer
Contact your brokerage and provide instructions to transfer the stocks to the charity’s brokerage account. You may need to complete a stock transfer form, so be sure to follow your broker’s guidance closely.
5. Notify the Charity
Inform the charity when the transfer is complete. They should acknowledge the donation and provide you with a receipt for tax purposes.
6. Claim the Deduction
When you file your taxes, be sure to itemize your deductions and use IRS Form 8283 to report the value of the donated stocks. Consult with a tax professional to ensure you maximize your deductions.
Potential Pitfalls and Considerations
While donating appreciated stocks is a beneficial strategy, there are some important considerations to keep in mind:
1. Holding Period
Short-term stock is stock that you have held for less than a year, while long-term stock is stock that you have held for more than a year. Donating long-term stock to charity allows you to avoid paying capital gains tax on the appreciation of the stock, not just the basis, providing a much greater tax benefit.
If you donate short-term stock to charity, you can only deduct the cost basis of the stock, which is the amount you paid for it. In the above example, you would only be allowed to deduct $1,000 which is the cost basis.
If you donate long-term stock to charity, you can deduct the fair market value of the stock, which is the amount it is worth on the date of the donation. In the example above, you would be allowed to deduct $50,000 which represents the fair market value of the stock.
2. Brokerage Fees
Donating stocks may incur brokerage fees, which should be factored into your decision. Some donors choose to cover these fees to ensure the full value of the stocks goes to the charity.
3. Market Volatility, Deduction Amount, and Precision
The stock market can be unpredictable and sometimes can have significant moves in a day. Transferring stock to a non-profit takes time to process. The value of the deduction is dependent on the official date of transfer to the charitable organization. It is important to keep this in mind particularly around year end as when the charity receives the stock can impact what year you can take the deduction.
4. Charitable Bunching
Conclusion
Donating appreciated stocks to charities is a powerful way to support causes close to your heart while enjoying substantial tax benefits. It’s a strategy that empowers both philanthropists and charitable organizations, fostering a culture of generosity and positive change. By understanding the process and considering the potential pitfalls, you can make the most of your charitable contributions and leave a lasting impact on the world.