Savvy donors know that making a gift of stock instead of donating cash is one of the best ways to make a gift to charity.
Seasoned donors also know that making a gift of an appreciated asset is one of the best ways to further give to the charities of their choice. Yet, despite the undeniable potential of these gifts, many individuals harbor reservations when it comes to this unique form of philanthropy.
Whether it’s fear of losing control of their money and assets, uncertainty about tax implications, or the perceived complexity of the process, it can seem daunting.
But by understanding the process and discovering numerous advantages, donors are empowered to embrace this transformative approach and unlock the true power of their investments.
In this 2023 comprehensive guide, we’ll walk you through the process of giving stock to charity, including:
- • How to take advantage of tax savings.
- • Current IRS rules.
- • Tips for making the most of your charitable donation.
So, let’s dive in!
Why Donate Stock to Charity?
Donating stock to charity offers three benefits.
1. Avoid long-term capital gains tax.
When you donate appreciated stock that you’ve held for more than a year, you avoid paying long-term capital gains tax on the increased value of stock. Depending on your income, the capital gains tax rate can be as high as 20%. This tax savings allows your donation to go further.
2. Receive a tax deduction.
When you donate stock directly to a charity, you are eligible for a charitable deduction equal to the fair market value of the donated stock. This allows you to reduce your taxable income and save on taxes.
3. Make a bigger impact.
If you decide to donate stock instead of cash, the tax savings gives your donation an extra boost that furthers the mission and programs of the charities you care most about.
Step-by-Step Guide to Donating Stock to Charity
1. Choose a Qualified Charity
Make sure the organization you want to support is a registered 501(c)(3) public charity.
The IRS has a Tax Exempt Organization Search tool you can use to verify the charity’s status.
You can also look at tools that analyze a charity’s transparency and accountability by using third-party assessment organizations like Charity Navigator.
2. Contact the Charity
Reach out to the nonprofit organization to confirm that they accept stock donations and to get their brokerage account information.
Many charities have a designated person or team to help with stock donations.
In some cases, a charity will have an online program that allows you to make this request online and will then handle the transaction until completion.
3. Contact Your Broker
Inform your broker that you’d like to donate stock to a charity. Provide them with the necessary information, including:
- • The name of the charity.
- • The charity’s brokerage account number.
- • The DTC number for electronic transfers.
Your broker can provide you with a list of stocks you own that have appreciated significantly and have been held at least 12 months.
4. Complete the Required Paperwork
Your broker may require you to fill out a stock transfer form or letter of instruction.
Be sure to provide all the necessary details, including:
- • The number of shares.
- • The name of the stock.
- • The charity’s account information.
5. Keep Records for Tax Purposes
The charity will send you a written acknowledgment of your donation, which should include the name of the organization, the date of the gift, and the number of shares donated. You’ll need this documentation to claim your charitable tax deduction.
6. Consult Your Tax Professional
Since tax laws can be complex, it’s always a good idea to consult a tax professional for guidance on your specific situation.
Maximize the Impact of Your Stock Donation
To make the most of your stock donation, consider the following tips.
1. Donate Long-Term Appreciated Stock
By donating stock that has appreciated in value and has been held for more than a year, you can maximize your tax savings by avoiding long-term capital gains tax.
2. Be Mindful of the Deduction Limit
Remember that your stock donation is limited to 30% of your adjusted gross income (AGI) for the tax year.
If you’re considering a large donation, work with a tax professional to determine the best strategy for maximizing your tax benefits.
3. Consider a Donor-Advised Fund
If you want to support multiple charities, a donor-advised fund (DAF) can be a convenient and tax-efficient way to manage your charitable giving all from one place.
Speak with an expert!
As a wise giver, you aspire to leave a legacy that blesses generation after generation. However, there’s no denying that maneuvering through the intricate realm of charitable donations can be daunting.
No need to fret – the Convoy of Hope Foundation is here to assist! Convoy boasts a skilled team of professionals who will steer you through the procedure, ensuring that you stay on course to achieve your aspirations of leaving a lasting impact.
Donor-advised funds may have additional fees so it’s wise to look at all costs.
Experience the magic of purposeful donations! Read our insightful article about Donor Advised Funds and embark on your journey of meaningful contribution.
4. Consider Bunching & Itemization
Bunching refers to consolidating multiple years’ worth of charitable contributions into a single year, surpassing the standard deduction threshold and allowing you to itemize deductions on your tax return.
By donating a significant amount of appreciated stock in a given year, you can amplify your tax benefits and potentially reduce your overall tax liability.
5. Leverage Mutual Funds & Privately Held Stock
By donating mutual funds directly to a charitable organization, you can contribute a significant amount while potentially avoiding capital gains taxes on the appreciation. Similarly, if you hold privately held stock in a company, donating a portion of those shares can have a substantial impact.
However, it’s important to consult with financial and tax advisors to navigate any restrictions or legal requirements.
6. Be Mindful of the Best Time to Sell Stock
By carefully monitoring market trends and consulting with financial advisors, you can identify opportune moments to execute your stock donation.
Donating stocks at their highest value allows the charity to receive a larger contribution, maximizing the potential impact of your generosity.
Moreover, by donating appreciated stocks held for more than a year, you can potentially eliminate capital gains taxes on the appreciation, which further optimizes the benefits of your donation.
7. Consider Replacing Stock Now at a Lower Cost Basis
This approach involves selling the appreciated stock you plan to donate and immediately repurchasing the same stock at its current, lower cost basis.
By doing so, you “lock in” the capital gains on the original stock and reset the cost basis to a lower level.
This allows you to maximize your charitable contribution and sets you up for potential future capital gains.
IRS Rules for Donating Stock to Charity
When donating stock to a charity, keep the following IRS rules in mind.
1. Holding Period – To claim the full fair market value of the donated stock as a tax deduction, you must have held the stock for more than one year. If you’ve held the stock for one year or less, your deduction will be limited to the stock’s cost basis (the original purchase price).
2. Deduction Limits – The IRS limits the amount you can deduct for charitable contributions of appreciated stock to 30% of your adjusted gross income (AGI) for the tax year. If your donation exceeds this limit, you can carry the excess deduction forward for up to five years.
3. Valuing the Stock – To determine the fair market value of the donated stock, use the average of the highest and lowest trading prices on the date of the gift.
4. Itemized Deductions – To claim a tax deduction for your stock donation, you must itemize your deductions on your tax return, rather than taking the standard deduction.
5. Publicly Traded Stock – The tax benefits discussed in this article generally apply to publicly traded stock and also include mutual funds, ETFs, and the like. Donating privately held stock is also allowed, but has a few differences that must be complied with to meet IRS guidelines. Privately held stock requires navigating some complexity to complete the transfer and not all charities accept these donations.
6. Tax Year – To claim the charitable deduction in a specific tax year, you must complete the stock donation by December 31 of that year.
Donating stock to a charity can be a powerful way to make a lasting impact on the causes you care about, while also enjoying significant tax benefits. But let’s face it, navigating the complex world of philanthropic giving can feel overwhelming.
Don’t worry — at the Convoy of Hope Foundation, we’ve got you covered! Convoy has a team of experts to help guide you through the process and make sure you’re on track to reach your legacy-giving goals.
Schedule a call today, and let’s kick off your journey to becoming a wise giver. Together, let’s make lasting positive change in this world.