Donating Stock to Charity Is the Ultimate Win-Win: Here’s Why
For most people, charitable contributions are mostly about what matters most to them — a way to help those in need or to begin righting a wrong. However, charitable contributions are also an excellent way for some earners to reduce their tax burden. And if you’re interested in maximizing the benefit to both yourself and the organization you’re contributing to, donating stocks can be a win-win situation that’s hard to pass up.
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In fact, donating your stock can allow you to avoid paying capital gains taxes on your returns, ultimately making for a larger contribution for the nonprofit and a larger deduction for you.[x No. 3] So, while donating a stock might not be your first impulse, there are a number of reasons why you should seriously consider it.
Donating Appreciated Stock to Charity
Donating stock to charity offers a win-win for both you and the organization you’re donating to. A donation of stock allows you to deduct the full market value of the stock from your taxable income. Essentially, you’re taking a capital gain that you would otherwise owe taxes on and converting it into a deduction that will save you taxes on your annual salary, so you’re avoiding taxes in two places. And the charity gets a larger donation than it would have received had you sold the stock and paid capital gains tax prior to making your donation.
There are some rules, though, dictating just how much tax benefit you can claim from a donation of stock. The first important consideration is the cap on charitable deductions. Generally, you’re allowed to reduce your taxable income up to a maximum of 50% of your adjusted gross income with charitable non-cash contributions. However, that cap is reduced to 30% for donated stocks that you held longer than one year and would have been subject to capital gains taxes had you sold it at fair market value.
You also should consider your other charitable contributions as the 50% cap on deductions applies to your total combined contributions. So, if you’ve made a donation of stock that’s 30% of your taxable income and donations of cash that are another 40% (wow, good for you!), you would only be able to deduct a portion of your cash contributions before hitting the donation maximum. In that case, your tax advisor can let you know whether you should save some of that cash to donate in the next tax year.
How To Donate Depreciated Stocks to Charity
It’s also important to note that in the event that the stock has lost value, the benefits are greatly reduced. In that instance, selling and then making a donation in cash makes more sense. By realizing a capital loss, you can reduce capital gains elsewhere to reduce your tax burden and the deduction for your charitable contribution — and the size of your donation — would remain the same.
How It Might Work
Here’s a hypothetical example of how a donation of stock can be of greater benefit for both you and your favorite charity.
Say you have $10,000 of stock that you purchased at a price of $5,000 some 10 years earlier. Even if your plan is to donate all of the proceeds from the sale to charity, you’ll have to make your donation after you pay taxes on those capital gains. So, if your annual income as a single filer is less than $441,450, or below $496,600 for people who are married filing jointly, you’ll owe 15 percent in capital gains tax on that $5,000 gain you just realized — or $750. So you’ll have $9,250 left to give to your favorite charity, should you choose to sell and then donate the cash.
But with a donation in stock, you can give the $10,000 in stock directly to the charity so you won’t have to pay that $750 in capital gains tax. Once more, since your donation is now the full $10,000, that same $750 you would have owed in taxes is now money you can deduct from your taxable income as a charitable contribution. And the charity gets another $750. Win-win.
Strategies for Maximizing Your Tax Benefit
In addition to offering a great way to get even more mileage out of your charitable giving, the personal benefits can be considerable.
For starters, higher earners who have some portion of their income falling into one of the higher tax brackets could receive a double whammy of benefits. Not only are you effectively skipping out on the capital gains tax, but you’re reducing the portion of your income that you might be paying anywhere between 22% and 37% in taxes on.
There also is an opportunity to use donations to your favorite organizations to rebalance your portfolio. If you have plans for making charitable contributions this year while you’re also concerned that a specific holding is taking up too large a portion of your investments, you could accomplish two things at once by using that stock you otherwise would be selling to make your donation.
Finally, if you’re a more active trader or someone who enjoys being a hands-on portfolio manager, you might see a donation of a top-performing stock as a way to sell high without actually selling. If you’re seeing signs that make you think a stock is near its peak, you’re likely considering a sale. In that case, you might reap considerable benefits to reducing that especially large taxable capital gain — and if you’re in a top tax bracket — potentially seeing a big reduction in your income taxes while you’re at it.
Strengthen Your Giving by Donating Stock
Donating stock might feel a little unorthodox for a lot of people, but it can have significant benefits for your taxes, especially if you have a high annual income. You can reduce your taxable income, avoiding owing taxes on a capital gain and support an organization you believe in, all in one fell swoop.
With the idea fresh in your mind, now is a good time to consult your tax advisor or tax attorney to begin plotting a strategy to donate some stocks to a favorite charitable organization.
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Jami Farkas contributed to the reporting for this article.
Last updated: Jan. 29, 2021