Donating to charity is a common way to reduce taxes since donations can be listed as itemized deductions on a federal tax return. While you are probably familiar with donating cash or possessions, you might be surprised to learn that you can donate securities to qualified charities. In fact, it’s typically much more beneficial to donate appreciated securities than cash from a tax standpoint – in other words, it’s a great way to both give and receive more!
In this article, we will take a look at why and when donating shares make sense, as well as the mechanics behind actually making a donation.
Why Donate Shares to Charity?
Many people aspire to give to the causes that are important to them. For example, you may donate once a year to your favorite charity or give each week to a local church. Charitable donations can be made through individual contributions, employer matching/payroll deduction, special events, or even through brokerage accounts. Aside from financial donations, you may decide to give back by donating your time for volunteering or giving away personal property.
Those that itemize their deductions – rather than taking the standard deduction – can also benefit from reduced taxes when giving to qualified charities. While we will take a closer look at specific tax advantages in the next section, donating shares lets you – and the charity – essentially avoid paying long-term capital gains taxes. This results in more money reaching the pockets of those in need and less money sent to the government’s coffers.
If you’re already donating on a regular basis and qualify for itemized deductions, you may want to consider donating shares of stock rather than cash to maximize your giving.
The Internal Revenue Service (IRS) lets you deduct many different forms of charitable contributions when itemizing deductions on Schedule A of your 1040 federal tax return. When it comes to donating shares of stock, IRS guidelines permit the charitable giving of most types of common stock with a few exceptions. Of course, it’s worth reiterating that you must be itemizing your deductions in a higher tax bracket to realize these benefits.
The IRS defines a qualified appreciated stock as follows:
Qualified appreciated stock is any stock in a corporation that is capital gain property and for which market quotations are readily available on an established securities market on the day of the contribution. But stock in a corporation doesn’t count as qualified appreciated stock to the extent you and your family contribute more than 10% of the value of all the outstanding stock in the corporation.
If you do not own stock that has appreciated in value, then it’s often best to sell the stock at a loss and donate the cash to charity. You can then claim the excess loss and deduct it against other kinds of income rather than not taking the loss and giving up the deduction. But, appreciated stock gives you the opportunity to avoid paying any long-term capital gains taxes.
Let’s take a look at an example of selling appreciated stock and donating the proceeds versus donating the appreciated stock directly to see the tax advantages:
|Sell Stock & Donate Proceeds
|Donate Stock Directly to the Charity
|Fair Market Value
|$50,000 (500 shares x $100 per share)
|$50,000 (500 shares x $100 per share)
|Long-term Capital Gains
|Amount Donated to Charity
|Personal Income Tax Savings
* Assumes taxpayer itemizes their deductions, has a $2,500 cost basis, 15% long-term capital gains tax rate, and 33% federal income tax bracket with no state or local taxes.
In the example above, you realize a 25 percent greater personal income tax savings and contribute 17 percent more to charities by donating shares versus selling shares and donating the proceeds. The simple reason is that you avoid paying long-term capital gains taxes on the shares donated, which results in more value donated and a larger write-off. Charities can also sell the shares at their market value without paying any capital gains taxes.
How to Guide
The first step in donating shares is determining how many and which shares to donate. The IRS lets you deduct up to 30% of your adjusted gross income when donating securities, which is less than the 50% limit for donations of cash or short-term property. The exact amount that you choose depends on your financial and giving goals. Once you’ve settled on an amount, you should choose shares with the lowest basis and the highest accrued capital gains tax exposure.
There are several steps to donating shares to a charity:
- Contact your brokerage firm and tell them about your plans. They will probably have you fill out a transfer form that requires the charity’s brokerage account information.
- Contact the charity and ensure they will accept stock donations. They will need to know the name of the stock, the number of shares, and when they’re expected to arrive. That way, they can match the transfer to you since it might not be named.
- Ask the charity for a tax receipt when the transfer is complete for your records. The gift is counted on the date that the stock is transferred, so it must be by December 31 if you want the current year’s charitable deduction.
If you still want to maintain the stock position in your portfolio, you can donate low-cost basis shares and buy the same number of shares in the open market to replace them. This will help you retain your asset allocations and avoid any imbalances in your portfolio. The wash sale rules do not apply since there’s a gain, so you don’t have to wait 30 days to repurchase the stock. In essence, you’ve given yourself a “step-up” in basis without recognizing a gain!
Share donations must be reported on Schedule A of your 1040 federal tax return. When the total charitable deduction exceeds $500, you must also complete Form 8283 Noncash Charitable Contributions. You will need to include the date acquired, how it was acquired, your cost or adjusted basis, the date of contribution, and other details on these forms. Of course, it’s generally a good idea for a tax professional to review them to ensure accuracy.
The Bottom Line
There are many different ways to give to charity, but if you qualify for itemized deductions and fall into a higher tax bracket, you may want to consider donating shares instead of cash. While the process is a little more involved, it can result in a much greater tax savings for you and a larger paycheck for the charity of your choice. Talk to your financial advisor or tax professional to discuss how much to donate and ensure that it’s properly reported to the IRS.