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Giving stock instead of cash as a donation can greatly benefit the donor as well as the recipient. You will find that many charities, hospitals, schools, donor-advised funds, and other nonprofit organizations will accept stock as a gift.
Key Takeaways
- Many non-profits, such as hospitals, schools, and various other organizations, will accept stock as a gift or donation.
- Giving stock often results in a larger donation to the organization, as the gift is tax-deductible and there are no capital gains taxes to pay.
- If your stock has risen in value since purchase, donating it directly is preferable, but if it’s lost value, it may be more advantageous to sell it first and then donate the proceeds, so the giver can take the tax loss.
Tax Benefits of Donating Stock to Charity
If the stock has increased in value from the time of purchase, the owner can avoid paying capital gains tax by donating the security to a qualified charitable organization. When an appreciated security held for at least a year is donated to a charitable organization, its fair market value may be itemized as an income tax deduction. The resulting tax savings could be factored in to make a larger donation.
For publicly traded shares, the fair market value is the average of the high and low price on the transfer date. For stock not traded publicly, such as that in a company before its initial public offering, donations with an estimated value below $10,000 do not require an appraisal. As with donations of publicly traded stocks, however, the donor is required to fill out Internal Revenue Service Form 8283.
Example of Tax Savings on Donated Stock
Let’s say you bought 100 shares of XYZ Corp. two years ago at $20 per share, for a $2,000 cost basis (100 x 20 = 2000). If XYZ now trades at $50 per share, the fair market value of your 100 shares has risen to $5,000 (100 x 50 = 5000).
If you were to sell those shares in order to donate the after-tax proceeds to charity, you would owe $600 in federal taxes under the top long-term capital gains tax rate of 20% ((5000 – 2000) X 0.2 = 600). That would permit a donation of $4,400 (5000 – 600).
Donating the stock instead would net the charity its full $5,000 value. It would also entitle you to claim a $5,000 itemized deduction, within certain limits.
What a Year Will Buy
The value of an itemized deduction for stock donated less than a year after purchase is limited to the donor’s cost basis. Capital gains on shares held less than a year are taxed as ordinary income rather than the more favorable long-term capital gains tax rate.
Limits on Tax Deductions for Donated Stock
Deductions for donations of appreciated stock that would have been subject to the long-term capital gains tax are limited to 30% of adjusted gross income for most qualified charitable organizations and to 20% for family foundations. For donations of stock that would have been subject to short-term capital gains or ordinary income when sold the deductions are limited to 50% of adjusted gross income (30% for family foundations).
Those limitations apply to each donation of stock rather than to all donations in a given year in the aggregate, but in no case can multiple deductions subject to the 30% limit exceed 50% of adjusted gross income cumulatively. The excess not deducted because of these limitations can, however, be carried forward for up to five years to be claimed as a deduction on a future tax return.
When Not to Donate Stocks
If a stock is trading for less than what you paid for it, it’s usually better to sell and donate cash to charity. This allows you to record a loss deductible on future tax returns.
It’s also best to avoid donating equity in publicly traded partnerships, including master limited partnerships. The fair market value of such donations is reduced by the value of accumulated depreciation that would have been subject to income tax at the time of sale. In addition, donors may be subject to taxation based on debt carried by the partnership.
Advisor Insight
Chris Hardy, CFP®, ChFC, EA, CLU
Paramount Investment Advisors, Inc., Suwanee, GA
One of the best ways to give to charity is through highly appreciated stock. Here is how it works:
Contact the charity to which you would like to donate. Many will have a brokerage account with one of the larger brokerage firms. They will give you wire instructions to have the stock transferred. Make sure that your brokerage firm knows that you do not want to sell the stock, but instead would like a “transfer in kind” to the charity. This way, the charity can sell the stock and use the funds for the charitable purpose without having to pay taxes on the gain.
If you have a stock with a built-in loss, do not donate it “in kind.” Instead, sell the stock and take the loss on your personal tax return. Give the proceeds to the charity, which will go on your Schedule A as an itemized deduction.