Once you’ve reached a point where you are somewhat financially secure, it’s nice to give back by donating to charitable causes that are important to you. Plus, you get a nice little tax deduction — and that never hurts.
Instead of giving cash, though, you can donate stocks to most charitable organizations. Here’s how to do it, and why you should.
How To Donate Stock to Charity
Most, but not all, charitable organizations will accept stock donations, so the first step is to check with your charity of choice to confirm that they will accept your stock. Next, you’ll want to determine the value of the stock on the date of transfer. This can be done after the fact, because you may not know the date until the transfer happens.
If you have a physical stock certificate –which is fairly rare these days– you will need to sign it, typically in the presence of a guarantor, which may be a broker or a bank. There may be a form on the back of the stock certificate that needs to be filled out.
If your stock is held in a brokerage account and you don’t have the physical certificate, you can usually complete the transfer instructions online. Check with your brokerage or look at the app to see what the process is to transfer the stock. You will typically need your account name, address and number, the name of the stock, and the number of shares you want to transfer. You’ll also need the account name and number and EIN number of the charity.
Why You Should Donate Stock to Charity
When you donate stock to a charity, you can deduct the fair market value of the shares as a charitable donation on your income tax return. If the stock has increased in value since you purchased it, you’ll get a deduction that is larger than the amount you paid for the stock. Plus, you will not have to pay capital gains on the sale of the stock, as you would if you had sold it for cash.
What Is the Best Way to Donate Stock?
Here’s an example. Bill purchased 100 shares of XYZ Company for $10 per share in 2015, spending $1,000 total. The stock has appreciated since then and is now worth $20 per share, or $2,000 total. If Bill sells the shares, he incurs a capital gains tax bill of $150–$1,000 of gain times 15% long-term capital gains tax.
Are Stock Donations to Charity Tax Deductible?
On the other hand, if Bill donates his appreciated shares of XYZ Company to a charity, he can deduct the fair market value of $2,000 from his income on his tax return. Not only that, but he does not have to pay the capital gains tax on the shares. So Bill will pay tax on $2,000 less in income than he otherwise would have, plus he does not have to pay a $150 capital gains tax.
How Much Appreciated Stock Can I Donate to Charity?
There are limits to the amount of appreciated stock you can deduct as a charitable donation. Generally, you can deduct at least 20% of your adjusted gross income in this way. So, if Bill’s AGI is $100,000, he could deduct up to $20,000, if he donated stock worth at least that much. In some cases, you can deduct more – for example, you can deduct up to 50% of your AGI if your donation is to a church, educational organization, hospital or a private operating foundation.
Tips on Donating Stock to Charities
Publicly traded stocks are the easiest to donate since there is less paperwork involved. Generally, you don’t want to donate equity in master limited partnerships or other publicly traded partnerships.
If you’re trying to determine which of several positions to donate, choose the stock that has appreciated in value the most. This will provide the biggest benefit to the charity, and the biggest tax benefit to you.
Make It a Regular Thing With a Donor-Advised Fund
If you want to make charitable donations of appreciated securities a regular part of your charitable giving, you can set up a donor-advised fund. This allows you to put the shares you want to donate into a fund and then make the donations to however many charities you want, whenever you want. The bonus here is that you can take the charitable deduction when you move the stock into the donor-advised fund, regardless of when you actually transfer the shares to the charities.
Donating From Your IRA
Here’s another way to get added tax benefits from your charitable contributions of appreciated stock. If you are 73 or older and are required to take minimum distributions from your IRA or other retirement account, you can donate those distributions instead of taking them in cash. This is known as a Qualified Charitable Distribution or QCD, sometimes called a charitable IRA rollover.
You can instruct your IRA administrator to send up to $100,000 of your RMD directly to a charity rather than taking the distribution yourself. This reduces your adjusted gross income since IRA distributions are treated as income for tax purposes. While you don’t get a tax deduction for the charitable contribution, the deduction in AGI may result in other deductions or credits based on the lower income.
Is It Better To Donate Cash or Stock to Charity?
It’s a good thing when your stock goes up in value, but the sting of capital gains taxes can take some of the joy out of those earnings. If you make charitable donations anyway, making them with appreciated stock instead of cash makes a lot of sense.