Charitable Contributions of Stock
By Roy Lewis
While donating money to worthy causes is something we think is great, it can be greater still to donate appreciated stock instead of cash. The tax advantages can be worth it. Here's how it works.
The first thing you need to do is evaluate how long you've held the stock. Stock held for one year or less falls in the short-term category, while stock held for more than a year is long-term. Next, figure out the stock's fair market value. This is what you would receive if you sold the stock on the day you make the charitable contribution. It doesn't mean you have to sell the stock then -- just figure out its value on that date.
With stock held for the short term, you can claim it as a contribution, and deduct the fair market value less the amount it has appreciated since you've held it. In most cases, this means that your deduction is basically your initial cost basis for the stock. For example, if you bought shares for $800, held them for a year or less, and donated the bundle when it was worth $1,000, you're looking at an $800 deduction. Not a very good plan from a tax standpoint.
But, if the sale of the stock on the day of the contribution would result in a long-term capital gain (meaning that you held the shares for more than one year), you can generally deduct the full fair market value of the donated shares.
Example: You've held 100 shares of stock for more than one year and the shares are worth $20 each on the day you donate them. Your charitable contribution deduction is $2,000 -- no matter at what price you originally bought the shares.
Consider that, if you bought the shares long ago at $5 per share, your capital gain would be in the neighborhood of $1,500. By donating the stock, there's no gain on which to be taxed. At 20%, the tax on $1,500 would have been $300. You're getting a deduction for a $2,000 donation, and can simply ignore any taxes on the appreciation. You can thumb your nose at Uncle Sammy for the $300 in taxes that you would have paid if you had you actually sold the stock and donated the cash. Powerful stuff, eh?
But, don't forget: The best-laid plans for charitable contributions could backfire on you if you don't itemize your deductions. If you use the "standard" deduction, a charitable contribution of appreciated stock might not provide you with all of the tax benefits you expect. Obviously, the desire to make a charitable contribution shouldn't be exclusively tax-benefit driven, but it's always nice to receive the most tax-favorable treatment available.
How It's Done
To donate stock, you just have to transfer ownership of the shares. That may be easier said than done, but don't become discouraged. Your broker can help you with that, as can the charity to which you're planning to contribute. In some cases, you might find that the charity has an account with the same broker that you use. That would make it a simple "book" entry for the broker to make the transfer... and secure your charitable contribution.
In other cases, you may have to "sign over" the actual shares to the charity. That can be a bit more of a hassle... for both you and the charity. If you are going this route, make sure that you have an understanding of how you physically transfer shares of stock. Perhaps you can talk your charity into opening an account with your broker. Then you would be back to the simple "book" transfer. You'll generally find that charities are very easy to work with when you offer them a donation.
Finally, you might consider using a commercial charitable "gift trust" as a conduit between you and the charity. These gift trusts allow you to transfer the shares to the trust, take the appropriate deduction for the appreciated value of the shares, and then write a check (from the trust) to the charity for the donation amount that you would like to make. Using a gift trust is especially helpful when you have a large position in a stock (or stocks), but you have a number of charities that you want to favor with a contribution. It makes the paperwork much easier to deal with.
Many mutual funds have these types of gift trusts available. One commercial fund that I have used in the past is the Fidelity Charitable Gift Fund. You might want to check this (and others) out, since they offer some real advantages from a tax, administrative, and investment standpoint.
Which Stocks to Give?
If you're planning to donate stock, choose carefully which shares you give. The factors that should most influence your decision are how long you've held the given shares and whether they have appreciated or not (and by how much).
If a stock has actually fallen in value, for example, you're better off selling it so that you can claim the capital loss on your tax return. Then, if you wish, you can donate the proceeds of the sale to generate a contribution deduction.
If the stock you donate has appreciated considerably, you'll realize a large charity deduction. Great. But, remember that your total deductions for this type of charitable contribution are generally limited to 30% of your Adjusted Gross Income (AGI). And, even though you can carry-over (but not back) any excess contribution for five years, you won't receive the most current "bang" for your buck if you over-contribute.
Remember that making a contribution of a stock rids your portfolio of that stock. Is that what you want to do? You might consider making a contribution of a stock that has not only appreciated, but has also fallen out of (your) favor because the fundamentals of the company have changed. Contributing a stock that you really love can be a not-so-great idea, as you'll miss out on any future appreciation. The charity will likely sell the stock that you donate as soon as it receives the shares. So, giving some little gem that you found, thinking that the charity will benefit from its future growth, may not do as much good as you hope, and might also not be healthy for your portfolio. It's all part of the process of managing your investments and maximizing your contributions. It's a balancing act.
Finally, if you do have a winner that you think is going to be a bigger winner in the future, you may still make a contribution of that stock and keep it in your portfolio. How? Simply buy it back after you make the charitable contribution. It'll cost you real live dollars to do it, but you may still benefit greatly in the long run. And, you don't even have to wait more than 30 days before buying it back, as the wash sale rules don't apply to stock sold at a profit.
A Foolish Thought
We believe that charitable giving is just another part of a Fool's life. And, it's a good life. Part of being a Fool is helping others -- and charitable contributions do just that. If done correctly, the only loser is Uncle Sammy, and he isn't upset about being a loser here. These deductions are granted by legislative grace because the government realizes that we're all better off when many of us make contributions to our favorite charities. So, if you can do good things with your contributions, and save yourself tax dollars at the same time, it's certainly something to consider.
Remember, though, as with all tax-related issues, there are always details to consider that relate to your particular situation. You'd be well advised to consult IRS Publication 526 or a tax professional for additional information, restrictions, and requirements.