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When it comes to charitable giving, your instinct may be to reach for your checkbook or credit card. But if you’re looking to potentially increase your gift and tax deduction, consider donating your appreciated stocks directly to charity.
When Donating Stock to Charity is a Good idea.
Donating appreciated shares of stock can provide two important tax benefits.
First, if you donate a security with an unrealized capital gain directly to charity, you won’t have to pay capital gains tax on the sale of the stock. If you’re above the Net Investment Income Tax (NIIT) threshold, you will also avoid paying the Medicare surtax (3.8%). This could mean eliminating 23.8% in federal taxes if you’re in the top tax bracket. And because the charity is a tax-exempt organization, they won’t pay capital gains tax either when they sell the stock.
Second, if you itemize your tax deductions, your charitable deduction will be based on the fair market value (FMV) of the stock at the time of transfer (assuming you’ve owned the stock for more than 1 year).
These two factors mean it’s often best to donate the stock in your portfolio with the largest unrealized gain because it offers the greatest potential tax benefit.
But also consider these scenarios:
- If you are planning to rebalance your portfolio to get it back in line with your target asset allocation, you could donate the over weighted shares
- If you have a concentrated position in one stock—potentially from your employer stock compensation—you can donate some shares to reduce concentration risk in your portfolio
By directly donating stock, you may have more money to give to charity than if you sold the stock, paid the taxes, and donated the cash—a win-win for both you and the charity.
Donors should also consider a few ground rules:
Rule #1: Be aware of the AGI deduction limits based on the type of asset you’re donating. For cash donations, donors may deduct up to 60% of their adjusted gross income (AGI). With stock donations, however, you are limited to 30% of AGI, meaning you may need to carry deductions into future tax years if your contribution exceeds this threshold. (You can carry forward an unused charitable deduction for up to five years.)
Rule #2: Keep your receipts. The charity should provide you with written confirmation of your contribution. You’ll want records showing:
- Name, address, and tax identification number of the charitable organization
- Date of your contribution
- Description of the stock (name, ticker, number of shares, FMV on the date of donation)
- Confirmation that no goods or services were received in exchange for the donation (if you want to fully deduct the donation)
Stocks You Might Consider Donating
- Stocks you’ve owned for over a year—Securities owned for at least one year and one day are considered long-term capital gains. When you donate these shares to charity, you’ll receive a tax deduction equal to the full fair market value (FMV) of the stock on the date of transfer. (Technically, your deduction will be the average of the stock’s highest and lowest selling prices that day.)
- Highly liquid stocks—Before transferring stock, you need to make sure the charity is willing to directly accept non-cash gifts. Charities typically look to sell stock gifts as quickly as possible, both to generate cash that the organization can redeploy to fulfill their needs and to reduce the risk that the stock value will go down. Assuming the charity can accept stock gifts, it’s often easiest for charities to accept stock that is trading on a public exchange and easy to liquidate.
Think Twice Before Donating These Stocks
- Stocks owned for less than a year—If you’ve owned the stock for one year or less, your charitable deduction will be limited to your cost basis in the stock (oftentimes, your cost basis is roughly the value of the stock when you bought it). In other words, while you can still donate stocks that don’t meet the long-term holding period, your tax benefit is greatly reduced.
- Stocks that have lost value—In most cases, you won’t want to donate stocks that have decreased in value below your cost basis. You will likely want to realize these losses, as there are tax benefits to you, including netting against any realized capital gains or carrying the loss forward to future tax years.
- Complex assets—Some charities may not be equipped to handle complex assets, such as privately held C-Corp or S-Corp shares, private equity and hedge fund interests, commodities, and real estate investment trusts (REITs). Consider transferring these assets to a charitable giving vehicle such as a Donor Advised Fund oar charitable trust and reallocating the assets within the giving vehicle to make distributions to charity.
- Restricted stock—Just like complex assets, you need to be sure the charity has the resources and experience to accept and liquidate restricted stock. Additionally, if you are considered a “control person” in your company (for example, you are an officer, director, or 10% shareholder), you will be subject to SEC Rule 144, which regulates the public resale of restricted securities. You and the charity may also need to gain approval from the company to transfer or sell shares. If the organization does not have the systems in place to accept restricted stock, consider donating your restricted stock to a Donor Advised Fund (DAF), which is a turnkey charitable giving vehicle with low costs and complexity. Essentially, you can liquidate the shares inside the DAF and then transfer cash from the DAF to the charity.
Types of Charities You Can Donate Stock To
There’s no shortage of good causes out there, and as a result, there’s likely a wide variety of organizations competing for your charitable attention. For those seeking to make a tax-deductible donation, however, it’s important to double-check that you’re contributing to a qualified charity. The IRS provides a list of organizations that do not fulfill their requirements for charitable deduction, including certain political, civic, and lobbying groups. It’s a good idea to check this list before you begin planning.
As a donor, you should also be beware of the differences between public charities, private operating foundations, and private non-operating foundations.
Public charities are organizations that receive support from a wide cross-section of donors. Private foundations receive funding through private contributions, investments, and endowments. A private operating foundation will spend substantially all of its income each year fulfilling its charitable mission, while a private non-operating foundation will typically make grants to other organizations and may not distribute all their contributions received each year.
When it comes to the deduction benefit, private non-operating foundations offer a smaller tax deduction. When donating stock to public charities and private operating foundations, donors may deduct up to 30% of AGI. When donating stock to private non-operating foundations, deductions are limited to just 20% of AGI. Always be sure to double-check which category your organization of choice falls under.
As mentioned above, some investors find it advantageous to set up a Donor Advised Fund (DAF) to help facilitate the donation of stock. An investor holding a stock with a low-cost basis (which would be subject to capital gains tax if sold) can instead transfer the asset to a DAF and make a grant to a charity of their choosing at some future date. Donors can take an immediate tax deduction. DAFs also offer donors flexibility when liquidating a stock, allowing them to either convert it to cash immediately or reallocate the donated shares to other investments and potentially grow the money over time. You can learn more about using Donor Advised Funds (DAFs) and Charitable Trusts in our podcast episode here.
When’s the Best Time to Donate?
Whether for tax planning reasons or the season of giving, most people tend to think about charitable donations near the end of the year. While most charities are doubtlessly happy to accept contributions at year’s end, receiving donations throughout the year helps organizations better project their financials and budget.
Market volatility can have an outsized impact on the timing of your stock donation, particularly if you’ve previously pledged a specific dollar amount to an organization. If the FMV of the stock you’re donating declines, you’ll need to donate additional shares to meet your charitable obligation. In this situation, investors should keep a close eye on the fluctuations of the market, opting to make their most substantial donations while their share value is up.
When It’s Not Such a Good Idea to Donate
While directly donating a portion of your stock portfolio can provide numerous opportunities to minimize your taxes and boost your charitable giving, in practice, there are a few exceptions. For example, some smaller charities (for example, houses of worship, foster homes and local food pantries) may not have a brokerage account set up to receive and sell stocks. For these organizations, cash donations may be a better mechanism for offering financial support.
Remember that you will only receive a tax deduction if you itemize your deductions. If you typically fall below the standard deduction line, consider a Donor Advised Fund (DAF) as a way to “bucket” several years-worth of contributions into one tax year. For example, if you make an annual gift to a charity, consider “pre-funding” five or ten years-worth of annual gifts to the DAF in one year. Depending on the size of your donation, you may get over the standard deduction limit in order to receive the charitable itemized deduction. And the DAF allows you to maintain the flexibility to dole out your donations to charities over multiple years.
Want to Optimize Your Charitable Giving?
Charitable giving can be a fulfilling part of having wealth. Through your own financial wellness, you can make a positive impact on the causes you care about most in this world. Still, you don’t just want to give blindly. When structuring your donations, there’s a number of challenges you may encounter—tax pitfalls, deduction limits, liquidation issues—which is why it’s important to stay well-informed about contribution rules and requirements.
To maximize the benefit for both yourself and the recipient of your donation, you’ll need a strategy that is personalized to your specific financial needs and objectives. This is where Private Wealth Design comes into play. By helping you design a customized plan for growing your wealth over time, our team at Monument can help you consider all available charitable giving options, providing a clearer understanding of why it’s worthwhile to choose one over another.
Related: 6 Reasons Executives Must Prioritize Wealth Planning