In this blog article, we’ll delve into the intricacies of donating stock to charity, including how it works, who can benefit, and the associated tax implications.
If you’re philanthropically inclined, donating to charity can be an effective way to support the causes and organizations you value most. For strategic donors, charitable giving can offer valuable tax benefits.
In some cases, maximizing these benefits may mean exploring new giving strategies, such as donating stock to charity. If you hold shares that have appreciated significantly since you acquired them, gifting them to charity can help you achieve various financial objectives while fulfilling your philanthropic goals. To make the most of this giving strategy, however, it’s crucial to understand its nuances.
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Why Donate Stock to Charity?
Investing in equities, or stocks, is a popular strategy for individuals looking to grow their wealth. Over the long term, stocks have historically delivered returns that outpace inflation, offering real growth in purchasing power. This means that the money you invest today has the potential to buy more in the future than it does now, a crucial factor for long-term financial planning.
However, stock appreciation often comes with tax implications. When you hold stocks in a taxable account, any increase in the value of those stocks—referred to as capital appreciation—is subject to capital gains taxes.
These taxes can take a significant bite out of your profits when you decide to sell. For instance, if you initially purchased shares at $10 each and they grow to $100 each, the $90 difference (per share) is considered a capital gain, which is taxable.
As the value of these stocks rises, the potential tax liability also increases. So, if you’re looking to diversify your portfolio by selling some of your appreciated stocks, or if you need to liquidate for other reasons, you could be hit with a hefty tax bill.
To sidestep this, many savvy investors turn to charitable giving as a solution. By donating appreciated stock directly to a charity, you can avoid paying capital gains tax on the increased value of the stock. Additionally, you may be able to claim a tax deduction for the full market value of the stock at the time of the donation.
Tax Implications of Donating Stock
Donating stock to charity generally comes with two potentially meaningful tax benefits:
- Avoiding Capital Gains Tax. When you sell stock that’s appreciated in value within a taxable account, you’re typically subject to capital gains tax on the profit. In other words, if you bought 100 shares of stock at $20 per share and it’s now worth $100 per share, selling your position would generally mean paying capital gains tax on the hypothetical $8,000 increase in value. However, if you donate this stock directly to charity, the transaction bypasses this tax entirely since registered U.S. charities are exempt from capital gains taxes.
- Claiming a Tax Deduction. When you donate stock to an eligible charity, you can also take a tax deduction for the stock’s full market value at the time of donation, up to 60% of your adjusted gross income (AGI). This means that, using the previous example, you could claim a deduction for the full $10,000 donation, even though your original investment was only $2,000. This deduction can offset your taxable income, potentially moving you into a lower tax bracket or significantly reducing your tax bill.
Keep in mind that you must have held your shares for at least a year to maximize the potential tax benefits of your donation. You must also itemize deductions on Schedule A of your tax return, rather than taking the standard deduction.
If you’re considering donating stock to charity, be sure to consult with an expert to ensure you’re optimizing your charitable contributions from a tax perspective.
Who Can Benefit?
Donating stock to charity offers an array of advantages, not just from a philanthropic standpoint but also from a financial perspective. Various individuals and entities can benefit from this charitable strategy, including:
- Wealthy Individuals and Families. For those with substantial stock holdings, donating appreciated stock can be a viable way to manage potential capital gains taxes. As many wealthy investors look for ways to reduce their taxable estates, this strategy offers a means to achieve that goal while supporting causes they care about.
- Retirees. Those nearing or in retirement may have accumulated significant stock positions over their working lives. Donating some of these stocks can offer tax benefits while allowing retirees to make meaningful charitable contributions.
- Investors with Concentrated Stock Positions. If a substantial portion of an investor’s wealth is tied up in a single stock (perhaps due to company bonuses, stock options, or inheritance), donating shares can help diversify their portfolio while avoiding the capital gains tax that would otherwise come with selling.
- Young Investors. Those who’ve benefited from early investments in now-booming companies can use stock donations to give back and take advantage of potential tax deductions.
- Business Owners. Owners who’ve received equity as part of their compensation may find themselves with large amounts of appreciated stock that can be challenging to liquidate. Donating this stock can be a way to manage the position while reducing potential tax burdens.
There may be additional reasons to consider donating stock to charity. Milestone Asset Management Group can help you determine if this strategy aligns with your philanthropic and financial objectives.
How to Donate Stock to Charity
To ensure a smooth process, it’s essential to understand the steps of donating stock to charity. While a financial professional can help you navigate the nuances of this strategy, here’s a high-level overview of how it works:
- Choose a Qualified Charitable Organization. Before you donate, first verify that the organization is a registered 501(c)(3) charity. This designation means it’s a tax-exempt, nonprofit organization that can legally receive tax-deductible charitable contributions. Resources like Charity Navigator can also help you evaluate the efficacy and transparency of the charities you’re considering.
- Contact Your Account Custodian. Once you’ve identified an eligible charity, the next step is to reach out to your custodian and communicate your wish to donate certain stocks.
- Coordinate with the Charity. Before initiating the stock transfer, confirm that the charity has a brokerage account in place to accept and manage stock donations.
- Execute the Stock Transfer. Once both sides are prepared, proceed with the stock transfer. This typically involves completing a transfer form that your account custodian provides.
- Obtain a Donation Receipt. Make sure the receipt specifies the name of the charity, date of the donation, number of shares, and the stock’s ticker symbol. This will serve as a critical document when claiming tax deductions for your charitable donation.
Donating Stock to a Donor-Advised Fund (DAF)
While direct stock donations to charities can indeed be beneficial, using a donor-advised fund (DAF) as an intermediary can offer additional benefits to philanthropically inclined investors.
One of the primary advantages of a DAF is its ease of use. Instead of coordinating stock transfers to multiple charities, you can contribute to a DAF once and then recommend grants to various organizations at your own pace. Plus, you’ll receive one statement from the DAF detailing your contributions and grants, rather than tracking acknowledgments from multiple charities.
Additionally, when you donate stock to a DAF, you can take an immediate tax deduction for the full market value of the stock, just as you would if you were donating directly to a charity. However, you don’t have to decide which charities to support right away.
Instead, you can direct a portion of your contribution each year to the charitable organization of your choice. Meanwhile, you can invest the remainder of your funds within the DAF so that they can continue to grow tax-free, potentially increasing the amount available for grants over time.
Lastly, if you prefer to keep your donations private, a DAF allows you to make anonymous grants to charities. This means the recipient charities will not have access to your personal information like they would if you donated your shares directly.
Additional Considerations for Donating Stock
In many cases, donating appreciated stock to charity offers a twofold benefit. First, the charity receives a more substantial donation than it would if you first sold the stock, paid the taxes, and then donated the remaining cash.
Second, as the donor, you can benefit from the dual tax advantages of avoiding capital gains and receiving a tax deduction. This helps maximize your charitable impact while simultaneously minimizing your tax burden.
However, certain circumstances may warrant a different donation approach. For instance, if your stocks have lost value since you acquired them, it might be more beneficial to sell them first, claim the capital loss on your tax return, and then donate the cash proceeds to the charity.
Be sure to consult with a financial professional to develop a charitable giving strategy that achieves your goals.
Achieving Your Philanthropic and Financial Objectives
Donating appreciated stock to charity is a strategic move that can maximize the impact of charitable giving while offering significant tax advantages. It’s a thoughtful approach to philanthropy, combining financial planning with charitable intentions.
However, everyone’s journey is unique. An experienced financial advisor like Milestone Asset Management Group can help you craft a personalized plan that supports your charitable giving objectives, as well as your broader financial goals. Schedule an introductory phone call to get started.