Is donating stocks to charity a tax-saving strategy that’s right for you?
In today’s post, I’ll explain how a stock donation to your favorite charity can lower your tax bill while also maximizing the amount you can give.
Why is donating stocks better than donating cash?
To support a cause or charity you care about, any type of donation will obviously give you that sense of fulfillment that you can only get from helping others. But when we’re talking about tax advantages, donating stocks to charity can actually save you tax money.
Here’s how this double tax-advantaged strategy works:
- When you donate stocks directly to a charity, you can avoid paying capital gains tax on any increase in value since you purchased those stocks.
- If you itemize your taxes, you can claim a tax deduction for the full fair market value of the stocks you donate, up to 30% of your adjusted gross income (AGI).
Because you save tax money when donating appreciated stocks to a charity, you may actually be able to contribute more to the charity than you would have been able to give in cash. So it’s a win-win for you and the charity!
For example, let’s say you bought 100 shares of Amy’s Corporation for $20 each ($2,000 total) 5 years ago, and now those shares are worth $100 each ($10,000 total). If you donate these shares directly to a charity, you can claim a charitable deduction for the full market value of $10,000. However, if you first sold these shares instead, you would face capital gains tax on the $8,000 appreciation, so that would reduce the amount you could donate to the charity.
How do I donate stocks to a charity?
The process for donating stocks to a charity is usually pretty simple. Just follow these steps:
- To maximize your tax benefits, you’ll want to select stocks that have appreciated significantly in value and that you’ve held for more than a year.
- Make sure that the charity you’ve chosen is eligible to receive tax-deductible donations. You can use the IRS’ free tax exempt organization search tool to verify.
- Contact the charity to see if and how they like to accept stock donations. Most large charities will be able to handle the stock transfer directly and will have a process in place. Some smaller charities might request that you work with a specific financial institution to help facilitate the transfer.
- Then, all that’s left to do is work with your brokerage to provide the charity’s details and fill out any necessary forms to complete the donation.
How do I determine my tax deduction when donating stock to charity?
For tax purposes, the value of your stock donation is the fair market value of your stock on the date of donation, which is called the “valuation date.” To calculate the fair market value, you’ll typically average the highest and lowest quoted selling price on that day.
For example, if on the day of your donation, the highest selling price for a share of your stock was $25 and the lowest selling price for a share was $19, then the fair market value would be $22 per share (25+19=44 then 44/2=22).
If there were no sales of your stock on the valuation day, then you’ll find the fair market value by averaging the highest and lowest selling price on the nearest date before or after the day of your donation. You can work with your brokerage firm or your accountant if you need help coming up with the fair market value. The IRS also has guidance that can help.
Is there a limit to how much stock I can donate to charity?
In terms of a tax deduction limit when donating appreciated securities to a charity, you are generally limited to 30% of your adjusted gross income (AGI) for each tax year. If you donate to a private foundation, the limit can be 20% of your AGI for each tax year.
However, if your donation exceeds the limit, you may be able to carryover any unused deduction for up to five subsequent tax years.
What tax forms do I need to fill out for a deduction when donating stock to charity?
If your stock donation is valued at more than $500, then you’ll need to complete and submit Form 8283 when filing your annual tax return.
You should also keep any associated brokerage statement records as well as a donation receipt or confirmation document from the charity. It’s a good idea to provide those documents to your accountant so they can keep your records together in your tax return file.
What else should I consider when donating stock to a charity?
One thing to consider is if you think the stock you’re donating will continue to appreciate. You should work with a financial advisor to weigh the benefits of donating now rather than waiting and donating. Make sure to explain to them that you want to make the most of your donation and your tax savings.
You should also consider the big picture when it comes to your philanthropic goals. You may want to look into donor-advised funds which can allow you to make charitable contributions, receive immediate tax benefits, and then distribute the funds to charities in future years.
Donating stocks to charities can be a smart strategy for maximizing your charitable donation while also lowering your tax bill. However, before you start filling out forms to make the donation happen, make sure you consult a certified public account or financial planner who can confirm that your donation aligns with your overall financial goals and employs the best possible tax-saving strategies.
For other tax-saving tips, take some time to read through my free articles and watch my YouTube videos on these topics:
