In this blog post, we’ll explore the intricacies of donating stock to charity, including how it works, who can benefit, and key pitfalls to avoid.
If you’re philanthropically inclined, donating to charity can be an effective way to align your money with the causes and organizations you care about most. For strategic donors, charitable giving can also offer broader financial benefits.
Indeed, gifts of cash can benefit donor and recipient alike. But if you hold appreciated stock, donating your shares to charity can amplify the potential benefits for both parties. However, to successfully navigate this charitable giving strategy, it’s crucial to understand its nuances.
Potential Advantages of Donating Stock to Charity
Investing in stocks can have numerous financial benefits, including the potential for meaningful capital appreciation. Yet this appreciation can come with costly tax implications.
When you hold stocks in a taxable account, any increase in value above your original cost basis is subject to capital gains taxes. These taxes can significantly reduce your profits when you decide to sell.
For most taxpayers, the long-term capital gains tax rate is 15%, as of 2023. However, the highest earners are subject to a tax rate of 20%. That means if you need to liquidate your shares for any reason, you might be hit with a substantial tax bill.
One way to avoid paying capital gains taxes on appreciated stock is to donate your shares. Donating stock to charity has other potential advantages, including:
- Potential Income Tax Deduction. When you donate stock to a public charity, you may also be able to reduce your taxable income for the year.
- Magnified Philanthropic Impact. Suppose your shares are worth significantly more than when you acquired them. By donating them, the charitable organization receives a larger gift than if you had sold the stock, paid capital gains tax, and then donated the cash.
- Financial Diversification. Holding a concentrated stock position can expose you to significant risk if that stock underperforms. Donating shares provides an opportunity to mitigate this risk without having to sell the stock outright.
- Bypass the Wash-Sale Rule. Typically, tax laws prevent investors from selling shares and repurchasing the same stock within 30 days. But when you donate your shares, you can immediately repurchase the same stock at its fair market value, resetting your shares at a higher cost basis.
Tax Implications of Donating Stock
In general, donating stock to charity comes with two potentially valuable tax benefits:
- Avoiding the Capital Gains Tax. Suppose you bought 100 shares of stock at $50 per share within a taxable investment account. After two years, it’s now worth $100 per share. Selling your position would generally mean paying the capital gains tax on the $5,000 gain. But if you donate your shares directly to charity, you can avoid this tax altogether 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 deduction can offset your taxable income, potentially moving you into a lower tax bracket or significantly reducing your tax bill. Keep in mind you must itemize deductions on Schedule A of your tax return to claim this tax deduction.
The exact tax implications of donating stock vary by circumstance. Be sure to consult a tax expert, who can help you take full advantage of the potential benefits.
Who Might Consider Donating Stock to Charity?
Depending on your philanthropic and financial goals, donating stock to charity offers a range of distinct advantages. Those who may benefit most from this charitable giving strategy include:
- Individuals with Appreciated Stock: Investors who hold shares that have significantly increased in value can leverage this strategy to maximize their charitable impact while obtaining significant tax advantages.
- Retirees. Retirees are often particularly sensitive to taxes. For those who have accumulated large stock positions, donating shares can be an efficient way to manage their portfolio while contributing to causes they support.
- Families with Large Estates. Wealthy families seeking to reduce the value of their taxable estate might consider donating some of their stock holdings to charity. In doing so, they can pursue their philanthropic goals while potentially realizing immediate and longer-term tax benefits.
- Start-up Founders and Employees. Employees with in-the-money stock options or appreciated equity shares can use this strategy to avoid large capital gains taxes while giving back.
- Young Investors. Investors with early successes in the stock market can use this strategy to mitigate the associated tax implications and establish themselves as budding philanthropists.
Donating stock to charity is a versatile strategy that can serve a variety of donors. SageMint Wealth can help you determine if this charitable giving method makes sense within the context of your financial plan and goals.
How to Donate Stock to Charity
When donating stock to charity, it’s generally best to work with a financial professional who can guide you through the process. However, here’s a high-level overview of how it works:
- Choose a Charitable Organization. Before you donate, it’s important to verify that the organization is a registered 501(c)(3) charity. This designation is for tax-exempt, nonprofit organizations that can legally receive tax-deductible charitable contributions. In addition, online resources like Charity Navigator can help you evaluate the efficacy and transparency of the charities you’re considering.
- Consult Your Legal/Compliance Department. If you’re a company insider or restricted individual donating shares that you’ve acquired as part of your compensation, be sure to consult your legal/compliance department to ensure you’re donating within the proper windows.
- Contact Your Account Administrator. Once you’ve identified an eligible charity, the next step is to communicate your intentions to your account administrator or custodian.
- Coordinate with the Charity. Before initiating the stock transfer, be sure to confirm that the charity has a brokerage account in place to accept and manage stock donations.
- Execute the Stock Transfer. Once both sides are ready, you can proceed with the stock transfer. This typically involves completing a transfer form with your account custodian.
- Obtain a Donation Receipt. A receipt serves as a critical document when claiming tax deductions for your charitable donation. It should specify the name of the charity, date of the donation, number of shares, and the stock’s ticker symbol.
Donating Stock to a Donor-Advised Fund (DAF)
Donating stock directly to charity is a straightforward approach that allows donors to support causes they are passionate about while receiving potential tax benefits. Yet for those seeking enhanced flexibility, control, and strategic advantages, utilizing a donor-advised fund (DAF) as an intermediary can be an optimal choice. Here’s why:
- Greater Flexibility. A DAF allows donors to contribute assets today and recommend grants to their preferred charities at any point in the future. This means you can time your grants to align with your personal or financial objectives.
- Investment Growth Potential. Funds you contribute to a DAF can grow tax-free if you have the option to invest them. This can increase the amount available for future charitable grants, amplifying your philanthropic impact over time.
- Simplified Record-Keeping. Instead of tracking multiple receipts from different charitable organizations for tax purposes, you receive a single receipt for your contribution to the DAF. This streamlines tax documentation and makes year-end tax filing more straightforward.
- Privacy. DAFs offer donors the option of making anonymous grants. If you prefer to keep your charitable activities private, a DAF provides an added layer of confidentiality.
- Versatility in Asset Contribution. Beyond stocks, many DAFs accept a range of assets, including bonds, mutual funds, real estate, and private business interests.
- Legacy Planning. Donors can name successors to their DAF accounts, offering a structured way to pass on philanthropic values to the next generation.
Pitfalls to Avoid
By avoiding the following stock donation pitfalls, you can ensure you maximize your charitable impact while reaping the associated financial benefits:
- Overlooking Holding Periods. You must hold shares for at least a year before donating them to realize the full tax advantages of this strategy. Otherwise, you may limit your tax deduction to the stock’s cost basis rather than the current market value.
- Not Verifying the Charity’s Stock Acceptance Capability. Not all charities have brokerage accounts or the administrative capacity to handle non-cash gifts. Before donating, make sure your chosen charity is set up to accept stock donations.
- Failing to Properly Document the Donation. For tax purposes, you must maintain proper documentation of the stock’s fair market value at the time of the donation.
- Not Reviewing DAF Policies. Each DAF may have its own set of policies, procedures, and investment options. Be sure to review these thoroughly to ensure the DAF you select is in alignment with your philanthropic and financial objectives.
- Donating Shares that Have Depreciated in Value. If your shares have lost value since you acquired them, it might be more financially beneficial to sell them first, claim the capital loss on your tax return, and then donate the cash proceeds to charity.
- Neglecting Cost Basis. If you’re donating a portion of your shares, be sure to specify which shares you’d like to transfer to the charity or DAF, as donating the lowest-cost-basis shares will help maximize the tax benefits. This may be especially applicable to employees who have accumulated a significant amount of company stock and wish to diversify their portfolios.
Like any financial strategy, careful planning and diligence are essential when donating stock to charity. Be sure to consult an expert like SageMint Wealth to avoid costly missteps.
SageMint Wealth Can Help You Maximize Your Impact & Wealth
Donating stock to charity can be a smart way to maximize your charitable impact while benefitting financially. For investors with appreciated stock positions, it’s a unique way to strategically align your values with your financial goals and establish a legacy of giving.
At SageMint Wealth, we believe in living well while doing good. Our goal is to alleviate stress, create stability, and provide the guidance you need to create the future you want for yourself, your family, and the world. Contact us to discover how you can align your philanthropic goals with your financial plan and make the most of your hard-earned wealth.