If you’ve ever considered making a charitable contribution to help a good cause or organization you care about, one form of giving that you should look into is donating stocks or securities as opposed to straight cash. There are some benefits that could really help you maximize your generosity.
Charitable contributions through the form of stock donations is one route many people choose to follow because they can enjoy tax benefits if those assets have appreciated in value. The advantage only really applies if you’ve actually made an unrealized profit on your stock purchase, though–there’s no donated stock tax benefit if your investment has depreciated in value since your purchase.
Stocks as Donations
When it comes to donating stocks, the key to maximizing the tax advantages really comes down to whether or not your investment is profitable. If it is, you’re better off donating the assets to a charity. This helps you to avoid the dreaded capital gains tax and additionally, provides you with a deduction in the amount of your donation.
For example, let’s say you bought one share of stock in XZY for $100. If the stock goes up to $150, and you wanted to donate that sum, you have two options:
#1: Profitable Stocks
- Donate Cash: You could sell the one share for $150–minus the 15 percent federal capital gains tax–and make the donation in cash. The $127.50 in proceeds would be tax deductible, of course.
- Donate Stock: Or you could make the donation as a stock gift. The organization gets the $150 in stock–with no capital gains tax taken out–and you enjoy the full tax benefits of your charitable donation.
In this case, the donor actually gets double the tax benefits for their charitable gifts. They avoid having to pay the capital gains tax because the profits aren’t realized through a sale, and they also enjoy the tax deduction from the donated amount. State capital gains taxes may also apply to your realized profits as well. Again, this only makes sense if your stock holdings are profitable.
#2: Stocks at a Loss
If your investment is currently in the red, you’re better off selling the assets and donating the cash. Since the IRS allows you to deduct up to $3,000 in capital losses against your taxable income, you may as well realize the loss before you make the donation.
Let’s say that your $100 investment in XYZ actually went south to $75. Here’s why you’d be better off selling your share first and then donating the cash:
- Donate Stock at a Loss: If you gave your one share of depreciated XYZ as a donation, your tax write-off would only amount to $75.
- Donate Cash: On the other hand, if you sold your share and donated the cash, you could deduct the $25 in realized capital losses and the $75 in cash from the proceeds of the stock sale. That’s the full $100 that you can deduct against your income.
So, as you can see, there are intricacies to making donations that you can take advantage of to maximize your tax savings and impact of charitable contributions through stock.
Donating Stocks the Right Way
There are, however, a few things to consider when donating stocks as a charitable gift. Some of these details can have significant effects on your finances.
- Long-term versus short-term holdings: In order to be able to deduct the full market value of your stock donation–assuming it’s appreciated in value–you would have to have held the stock for one year or longer. If it’s a short-term holding, you would only be able to deduct the amount that you paid to purchase the stock. This would mean you wouldn’t be able to deduct the profits from your investment if you were to donate it.
- Stock Performance: While predicting future performance of investments is tricky, you don’t want to donate shares of a stock that’s about to implode to a charity or organization you actually want to help.
- Brokerage Account: A stock donations is great only as long as the receiving charitable organization knows what to do with it. Make sure the beneficiary of your gift has everything in place and is willing to accept stock contributions.
While your intentions may be good, it’s always wise to consult a tax professional and the organization you’re looking to help out before making any financial decisions on donating stocks. This way, you can make sure that the money and value you’re generously giving away is going to the right place.