Like many investors, given the general market environment of recent years, you may own stocks that are increasing in value (or other assets such as mutual funds). If the shares are held in a taxable account, it means that the decision to sell the shares at some point in the future may result in taxable profits.
One option to consider is to give the valued stock to a qualified charity. This may offer you tax incentives and may also bring greater gifts to the receiving organization.
Weigh the options
Donating stock rather than cash is most reasonable if it has been stored in a taxable account for over a year and is of high value. And if you’re already considering selling your position in that stock, that might be the best way to go.
Consider a situation where an individual wants to buy $ 2,000 worth of shares and use them to fund a donation to a qualified charity. In this example, assume that the stock was purchased 10 years ago for $ 1,000 and is now valued at $ 2,000. Donors can proceed in one of two ways:
Option A: Donors sell their shares and realize a capital gain of $ 1,000. Assuming that profits are subject to the highest long-term capital gains tax rate (20%) at the federal level, the federal income tax on profits is $ 200. Considering state taxes, it can be even higher. This allows only the after-tax value of the proceeds from the sale of shares (approximately $ 1,800) to be donated to charity.
Option B: Instead of selling the shares, the individual arranges to donate the shares to a qualified charity. In this way, there will be no sale of shares while owned by the individual and federal capital gains tax will be avoided. Ownership of $ 2,000 worth of shares is transferred to a charity. Organizations can sell their shares at any time without being affected by taxes, given their tax exemption status. Donors may be able to claim the full $ 2,000 of shares as a donation for tax purposes.
Benefits of donating shares
In this example, it is clear that there are several benefits to donating shares directly to a charity, rather than first liquidating the shares and donating the proceeds in cash.
1. Avoids long-term capital gains tax burdens as you do not have to sell your shares first.
2. The net value that can be donated to a charity is greater if you donate directly, rather than first liquidating the stock and donating after-tax cash income.
3. The larger the donation amount, the larger the gift tax credit.
This creates a situation that benefits both donors and charities. Organizations can choose to sell the shares they receive and monetize them immediately, or hold them to take advantage of their potential future profits. This can increase the value of your gift.
This strategy is especially useful for valuated stocks that are held for at least 12 months (subject to long-term capital gains processing). If the shares are held for less than 12 months, tax law allows you to deduct only the cost-based value of the donated shares. If a stock loses value, it is better to sell it first and then donate it to a charity. You may be able to use the capital loss on your tax return to offset some of your other profits or income.
Check options
Before deciding to donate your shares to a charity, check with your organization in advance to see if you can accept such a donation. Also, be sure to consult your tax adviser to get a clear understanding of the tax implications of your donation plan.
