Why You Should Donate Stock to Charity
As the year comes to a close, many people think about giving back to their communities and finding ways to save on taxes. One smart but often overlooked way to do both is by donating stocks that have gone up in value. This method can support your favorite causes and reduce your tax bill at the same time. Let’s break it down in simple terms…
Why Donating Stocks Makes Sense
Giving away stocks that have increased in value can help you in two big ways:
Tax Deduction: You can deduct the full current value of the stock from your taxes.
Avoid Taxes on Gains: You won’t have to pay taxes on the profit you’ve made from the stock.
For people with accounts where they’ve actively managed losses and gains, this strategy can be especially helpful. These accounts often contain stocks with a lot of unrealized profits, making them a great choice for donations.
Donating stocks can also help you align your money with your personal values. If you have stocks that don’t fit your investment goals or values, giving them away is a tax-efficient way to move on from them while helping a cause you care about.
Things to Keep in Mind
Before you start, here are the key things to know:
Donate stocks held for more than a year to get the full tax benefit.
The deduction is only beneficial if you itemize and exceed the Standard Deduction.
There are limits on how much you can deduct in one year (30% of your income for public charities, 20% for private foundations).
An Example: Increase Your Donation by 15%
Let’s say a married couple filing jointly (MFJ) owns stock worth $10,000 that they bought years ago for $3,000. If they donate this stock to charity:
They can claim a charitable deduction for the full $10,000, reducing their taxable income.
They avoid paying capital gains tax on the $7,000 profit. Assuming a 15% capital gains tax rate, that’s $1,050 in taxes they don’t have to pay.
If they then use $10,000 in cash to rebalance their portfolio, they can increase their cost basis for future tax benefits. This approach lets them support a cause they care about, save money on taxes now, and set up their portfolio for future savings.
Now, let’s compare this to what happens if they sell the stock and donate cash to the charity instead:
Selling the stock would trigger $1,050 in capital gains tax on the $7,000 profit.
After paying the tax, they’d only have $8,950 left to donate.
While they could still claim a deduction for the $8,950 cash donation, they’ve lost $1,050 in value to taxes.
By donating the stock directly, the couple saves that $1,050 in taxes and the charity receives the full $10,000 value. It’s a win-win for both the donors and the cause they care about.
Why Stocks Are Easy to Donate
Publicly traded stocks are particularly easy to donate because:
Their value is easy to figure out.
They can be transferred electronically without much hassle.
Most charities gladly accept them.
Stock Donation Tips
Donating stocks to charity can be straightforward, but it’s important to coordinate with the organization to ensure a smooth process. Here are a few tips to help:
Check If the Charity Accepts Stock Donations: Not all charities have the capability to accept stocks, so confirm this upfront.
Request the Charity’s Brokerage Information: You’ll need their brokerage account details to transfer the stock.
Work with Your Broker: Let your broker know which stocks you want to donate and provide the charity’s account details. This ensures the transfer happens smoothly.
Get a Receipt: Once the transfer is complete, ask for a receipt from the charity showing the value of the stock on the date of the donation. This is essential for your tax records.
Help Keep Your Portfolio Strong
After you donate appreciated stock, you can use cash to buy new investments. This does a few things:
Raise Your Cost Basis: This can lower the taxes you’ll pay when you sell the new investments later.
Create More Tax Opportunities: Starting fresh with higher-cost stocks can open up chances for future tax savings.
Balance Your Portfolio: Reinvesting can help spread out your risk if some stocks had become too large a part of your investments.
A Win-Win for Year-End Giving
If you’re thinking about donating to charity and managing your taxes, giving appreciated stocks could be the perfect solution. It’s a great way to lower your tax bill while supporting the causes that matter to you.
Contact Big Cake Tax to learn how to maximize your charitable giving strategy. We can help you save on taxes while making a meaningful impact all with a plan tailored to your unique financial situation.
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IRS Resources for Charitable Stock Donations
For additional guidance and credibility, here are some IRS resources you can consult:
IRS Publication 526: Charitable Contributions: This publication explains which types of charitable contributions are deductible, including donations of appreciated stock.
IRS Topic No. 506: Charitable Contributions: A helpful overview of charitable contributions, including deductions for non-cash assets like stock.
IRS Form 8283: Noncash Charitable Contributions: For stock donations valued at more than $500, this form must be filed with your tax return.
Make sure to consult these resources or work with Big Cake Tax to ensure your donation meets all IRS requirements and maximizes your benefits.
A Few of the Many Charities that Accept Stock Donations: