Donating stock can be better than giving cash
Americans make about $200 billion in tax-deductible gifts to charity each year, and most of them are in cash.
But if you have stock in your investment portfolio that has risen significantly in value since you bought it, you might be better off donating the stock instead of cash.
Doing so can boost your tax savings, allowing you to give more to charity or simply enjoy the fact that the contribution costs you less money.
Charitable groups are happy to receive stock, said Gail Berlant, director for distinguished giving at the American Cancer Society’s Los Angeles office.
“This is a wonderful way to donate to charity,” she said. “Any nonprofit would really appreciate stock donations.”
By giving away stock, you avoid selling the shares and realizing a capital gain that you would have to pay tax on. But the government still lets you deduct the current market value of the donated stock from your taxable income. The more the shares have gone up in price, the greater the advantage in giving them compared with writing a check.
“The added tax savings from donating appreciated securities over cash can be significant,” said Steve Feinschreiber, senior vice president of research for Fidelity Investments in Boston.
Let’s say you want to give $10,000 to charity. If you make that gift in cash, you can take a $10,000 deduction on your federal and state returns. If your top combined tax rate is 35%, that saves you $3,500 in federal and state income tax.
But let’s say you happen to have 1,000 shares of XYZ stock that you bought in 1985 for $1 a share and is now worth $10 a share, or $10,000.
If you sell those shares, you’ll have to pay a 15% tax on your $9,000 capital gain, setting yourself back $1,350.
If instead you give those shares to charity, you get the same $10,000 deduction for the full market value of the stock -- and the same $3,500 in tax savings that results.
But you also don’t pay any capital gains tax, saving $1,350. The total tax benefit of your gift: $4,850.
And you don’t have to worry about increasing the charity’s tax liability, because charities are exempt from income tax.
There are some tricks to getting the best bang for your donated shares, said Philip J. Holthouse, partner at accounting firm Holthouse Carlin & Van Trigt in Santa Monica.
First, you need to donate stock that you’ve owned for at least a year. If you’ve owned the stock less than a year, you can deduct only the amount you paid for the shares, not their current market value.
In the example above, that would mean you’d get only a $1,000 deduction, making the donation of such a short-term holding a much worse deal than giving cash.
Also, in deciding which stock in your portfolio to donate, you should choose the one that has gained the most in percentage terms since you bought it.
But what if you still want that stock in your portfolio? Simply buy shares of the same stock to replace the ones you’re donating, Holthouse suggested.
With charitable donations of securities, Holthouse said, there are no “wash sale” rules requiring you to wait a certain amount of time before buying the same stock that you gave away. And the brokerage commission you would pay to acquire the shares would be small compared with your tax savings.
Your portfolio will hold the same stock as before, but you’ll start off with no unrealized gain on the shares.
Replacing the stock in your investment account allows you to accomplish three goals: to provide a charity with a needed gift, to reduce the capital gains accumulating in your portfolio and to continue to own a stock that you believe has the ability to appreciate further.
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