Giving Back and Saving Big: The Benefits of Donating Stock for Tax Purposes
Introduction to Stock Donation
When most people think of charitable giving, they envision writing a check or making a cash donation. However, donating appreciated securities such as stocks, bonds, and mutual funds can be an equally effective way to support the causes you care about. By donating stock that has increased in value since you first acquired it, you can avoid paying capital gains taxes on the appreciation while also receiving a tax deduction (if you itemize deductions) for the full market value of the stock at the time of the donation.
For example, let's say you bought 100 shares of XYZ stock for $1,000 several years ago, and it is now worth $5,000. If you were to sell the stock, you would owe long-term capital gains taxes on the $4,000 gain. However, if you instead donate the stock to a qualified charity, you can avoid paying those taxes and receive a tax deduction for the full $5,000 value of the stock. This is a win-win situation for both you and the charity.
Tax you avoid using above example: $4,000 x 20% = $800
Amount that you reduce your taxable income by: $5,000 (if you have enough in itemized deductions)
Tax Benefits of Donating Stock to Charity and Avoiding Capital Gain Tax
Donating appreciated securities to charity can provide several tax benefits for donors. First and foremost, it allows you to avoid paying capital gains taxes on the appreciated value of the stock. This is particularly beneficial for donors who have held the stock for a long period of time and would owe significant taxes if they were to sell it. By donating the stock instead, you can put the full value of the stock towards your charitable giving without having to worry about the tax implications.
In addition to avoiding capital gains taxes, donating stock to charity also allows you to receive a tax deduction for the full market value of the stock at the time of the donation. This deduction can be applied against your adjusted gross income (AGI), which could be subject to limitations, for the year of the donation with any excess deduction carrying over for up to five additional years.
It is important to note that the IRS has specific rules regarding the deduction of charitable contributions, including donations of appreciated securities. Donors must itemize their deductions on their individual tax return (Form 1040) in order to claim the deduction, and the charity must be a qualified organization recognized by the IRS.
You will need to gain an understanding of itemizing deductions. It is important to set up a tax planning meeting with a CPA to make sure you can qualify for strategic charitable giving. Check out Connor’s other article at Maximizing Your Wealth: How Tax Planning Can Help You Thrive (fishingfortaxstrategies.com) which should give you a general understanding of why tax planning is recommended.
Helpful Link to IRS Schedule A for Form 1040: About Schedule A (Form 1040), Itemized Deductions | Internal Revenue Service (irs.gov)
How to Donate Stock to Charity - Step by Step Guide
If you're interested in donating stock to charity, the process is relatively straightforward. Here is a step-by-step guide to help you get started:
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Choose a qualified charity: Before donating stock, make sure the charity is a qualified organization recognized by the IRS. This information can typically be found on the organization's website or by contacting them directly.
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Determine the fair market value of the stock: The fair market value is the price that the stock would sell for on the open market. This is typically the value used to determine the tax deduction for the donation.
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Contact the charity: Let the charity know that you are interested in donating stock and ask for their specific instructions for doing so. They may have a dedicated account with a brokerage firm that you must use for the transfer.
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Initiate the transfer: Contact your brokerage firm and provide them with the charity's information and the stock you wish to donate. They will handle the transfer of the securities to the charity's account.
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Receive documentation: Once the transfer is complete, the charity should provide you with a written acknowledgment of the donation that includes the fair market value of the stock at the time of the donation. This documentation will be needed for tax purposes.
Conclusion and Final Thoughts
Donating appreciated securities such as stocks, bonds, and mutual funds can be a smart way to support the causes you care about while also minimizing your capital gain tax liability. By donating stock that has increased in value since you first acquired it, you can avoid paying capital gains taxes on the appreciation while also receiving a tax deduction for the full market value of the stock at the time of the donation. If you're interested in donating stock to charity, be sure to follow the steps outlined above and consult with a qualified tax professional to ensure that you are maximizing the tax benefits of your donation.
Guest Post Written By:
Connor Quinn, CPA. (July 17th, 2023). Giving Back and Saving Big: The Benefits of Donating Stock for Tax Purposes. https://www.fishingfortaxstrategies.com