The end of the year is almost on us, and charities are depending on you and millions of other Americans to make gifts of financial support. But before you write a check, bear in mind that the smarter move might be to take some of your winners from the stock market and use them to make your charitable gift. Giving stock to charity can not only give your charity the support it needs, but also benefit you by helping you cut your taxes.
The best way to give money away: appreciated stock
Given just how far the stock market has risen in the past several years, many investors are fortunate enough to have investments that have appreciated in value substantially. That's good news for the value of your investment portfolio, but if you own those investments in a taxable account, then you'll have to pay what could be a substantial amount of tax on the capital gains that those investments have earned since you bought them. Even at preferential long-term capital-gains rates, the prospect of paying as much as 20% of your hard-earned gains to the IRS probably isn't the kind of charity you had in mind.
To avoid that capital-gains liability, smart taxpayers use special provisions of the tax laws that allow you to use appreciated stock to make charitable gifts. When you give appreciated stock that you've held for longer than a year, you're allowed to take the full current market value of the shares as an itemized charitable deduction on your tax return.
Two things to keep in mind
There are a couple of traps to keep in mind when giving stock to charity. First, you're not allowed to deduct the fair market value on stock that you've held for a year or less. There, the capital gains would be treated as short-term, and as a result, you'd only be allowed to deduct the smaller amount that you actually paid for the shares, rather than their current appreciated value.
Second, if your stock has gone down in value, then this rule actually works against you. In that case, it makes more sense to sell the stock yourself, taking the capital loss on your own return, and then making a cash gift to charity from the sale proceeds, rather than giving stock to charity directly.
Some people don't like focusing too much on taxes when they consider their charitable gifts, feeling that it detracts from the true spirit of giving. But the tax aspects of giving stock to charity can actually make your philanthropic investing more interesting. Many wealthy investors pick specific investments in the hope of seeing huge gains that they can then use for their charitable gifts. For instance, many philanthropists familiar with the challenges that nonprofit hospitals and health care professionals face in treating HIV and hepatitis are aware of Gilead Sciences' (NASDAQ: GILD ) efforts to fight those diseases. Investing in Gilead's efforts has been quite lucrative this year, as the stock has doubled in price in 2013 alone, making the shares valuable currency for year-end gifts among its shareholders. Similarly, Facebook (NASDAQ: FB ) CEO Mark Zuckerberg used the doubling of his company's stock price in 2013 to great advantage for himself and his favored charity this month, giving 18 million shares of Facebook stock worth nearly $1 billion to the Silicon Valley Community Foundation. Meanwhile, even when philanthropic investors make less lucrative stock picks, they can use the resulting losses for tax-loss purposes.
As a way of making your charitable dollars go further, giving stock that has risen in value to charity has a lot going for it. With added tax benefits for you, you might be able to use your tax savings to make larger gifts than you otherwise would have been able to afford, helping those in need even more.
Cut your taxes as much as you can
Making the most of giving stock to charity is just one way you can help reduce your bill to Uncle Sam. In our brand-new special report "How You Can Fight Back Against Higher Taxes," The Motley Fool's tax experts run through what to watch out for in doing your tax planning this year. With its concrete advice on how to cut taxes for decades to come, you won't want to miss out. Click here to get your copy today -- it's absolutely free.