When planning your charitable giving for the year, don't forget the tax deduction for appreciated stock. At times, donating stock can be more advantageous financially for you and the charity than donating cash. Here are 6 tips for those considering donating stock to a charity.
Give Appreciated Stock
Only donate appreciated stock in which you have a gain. If you have a loss, you are better off selling the stock to book the loss for tax purposes and then contributing the cash proceeds from the sale to charity. You can use the capital loss to offset capital gains or, if you don't have gains to offset, $3,000 of the loss can be used to offset taxable income (with leftover losses carried forward to be used against income in future years).
Donate Stock Held More than a Year
Only donate stock that you have held for more than a year and, therefore, in which you have a long-term capital gain. You can deduct the full market value of stock held long term on your tax return, whereas if you donate stock held one year or less you can only deduct your cost basis in the stock.
Don't Sell First
Don't sell appreciated stock and donate the cash, because you will have to pay capital gains tax on the gain. By donating appreciated stock and letting the charitable recipient sell it, you not only benefit from deducting the full market value for the stock but you also avoid paying capital gains tax. For example, if your marginal tax rate is 28% and you donate stock with a market value of $10,000 on which you have a $2,000 capital gain, your tax savings will be $3,100 ($2,800 from deducting $10,000 against taxable income and $300 of capital gain taxes avoided at a long-term capital gain tax rate of 15%). If you sell the stock and contribute the cash to the charity, your tax savings will be $2,500 ($2,800 from the $10,000 deduction net of the $300 capital gain tax you will have to pay).
Donate Stock with the Largest Gain
As the math above indicates, the larger the capital gain on the stock you donate to a charity, the larger your tax savings. Therefore, if you have more than one appreciated stock of the same market value, donate the one with the largest capital gain.
Check with the Charitable Beneficiary First
Check with the charity to which you want to donate stock to be sure that it is set up to accept stock. Some charities, especially smaller ones, cannot accept stock.
Donor-Advised Fund
Rather than donating stock directly to a charity, another option is to donate it to a donor-advised fund. The fund will sell the stock and invest the proceeds for you until you direct it to donate the proceeds to a given charity. Some donor-advised funds have minimum donation amounts and they may not guarantee that your contribution will go to the charity of your choice, so be sure that you do your homework before choosing a donor-advised fund.
Sources:
Sandra Block, www.usatoday.com, Smart decisions help maximize charitable donations, deductions - USATODAY.com
Roy Lewis, www.fool.com, The Motley Fool Charity Fund: Donating Stock
