Giving stock instead of cash as a charitable donation can greatly benefit the donor as well as the recipient. You will find that many charities, hospitals, schools, and other nonprofit organizations will accept stock as a gift.
- Many nonprofits, 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 has 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 private company stock, which is not traded publicly, 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 (IRS) 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 = 2,000). If XYZ now trades at $50 per share, the fair market value of your 100 shares has risen to $5,000 (100 x 50 = 5,000).
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%: (5,000 - 2,000) X 0.2 = 600. That would permit a donation of $4,400 (5,000 - 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 at 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 (AGI) 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 tax when sold, the deductions are limited to 50% of AGI (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 AGI 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.
Reasons To Donate Stock vs. Cash
The main reason to donate stock to charity is that it allows you to give more money than with cash, as the above example shows. If you sold the stock and then donated the cash, you would first have to pay 20% of the cash in capital gains tax. Of course, this only applies if the stock has appreciated in value since you bought it.
Another reason is to reduce future capital gains taxes. If you replace the appreciated shares that you donated, you will be doing so at a higher cost basis than the old shares. Then, if the stock continues to appreciate and you want to sell in the future, you will pay less in capital gains tax than you would have if you still had the original shares.
The final reason is the ease of donation. You could make things cumbersome by giving multiple donations directly to multiple charities. However, if you utilize a donor-advised fund, such as those run by Fidelity Charitable and Schwab Charitable, you can simply put all the stock you want to donate in the fund in one easy transfer, take a full tax deduction for the total amount when you do, then decide later, with no deadline, to which charities you want the stock to go and when. The donation, though, is irrevocable. You can’t change your mind and take the stock back.
How To Donate Stock to Charity
In addition to using a donor-advised fund, there are other methods of donating stocks to charity. If the stock exists as a physical certificate, you must endorse it by signing it in the presence of a guarantor, usually a bank or broker. There can also be a form on the back of the stock that requires filling out. Once these things are completed, the stock becomes non-negotiable and thus transferable.
If there isn’t a physical stock certificate, which is usually the case, then the stock exists in a digital version stored in a brokerage account. Most brokerage accounts insist on written and signed authorization with specific instructions on how the transfer should be done. You will complete an online form that will include the following information:
- Account name and address
- Account number
- Stock description including the number of shares and the company name
- Account name
- EIN number
- Account number
If the shares are to be transferred within the brokerage firm where they are currently held, it should be fairly straightforward. However, if the transfer is being sent to another financial institution, the sender should contact the receiving institution for the firm’s procedures on completing a stock ownership transfer. The receiving institution will likely have an address for which the written authorization is to be sent or electronic transfer instructions, as the shares can be transferred electronically from the sending broker. Also, the sender will need to be sure there’s an account established with the receiving broker before completing the transfer.
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 the loss as deductible on future tax returns.
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.
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.
Can I Donate Stock to Charity?
Yes, you can, if the charitable organization accepts such donations, which most do. You must determine the fair market value, though. For publicly traded stock, that is the average of the high and low price on the transfer date. Private company stock requires an appraisal unless the estimated value is less than $10,000.
Why Should I Donate Stock Instead of Cash?
Because you can donate more money that way. If you sold the stock and then donated the cash, you would likely first have to pay a 15% or 20% tax on any long-term capital gains that the sale generated, depending on your tax bracket.
Is It Difficult to Donate Stock to Charity?
Not if you do it through a donor-advised fund. You simply put all the stock you want to donate into the fund and take an immediate tax deduction for the total. You can then advise the fund later, with no set deadline, on where the stock should go and to which charities.