What are the benefits of giving stock, instead of cash, to charity? Well, the tax advantages can make doing so very worthwhile. Here's how it works.
First, note whether your stock is a short-term holding or a long-term one. The former applies if you've held the stock for a year or less, and the latter kicks in if you've held for more than a year. Then figure out its fair market value. This is what you would receive from the sale of 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. So, stock bought for $800, held for the short term, and donated when it's worth $1,000 amounts to an $800 charitable deduction.
If the sale of the stock on the day of the contribution would result in a long-term capital gain, you can generally deduct the full fair market value of the stock. For example, if you've held 150 shares for more than one year and they're worth $10 each on the day you donate them, you can probably deduct $1,500.
Your main decision is whether to sell the stock and donate the proceeds, or whether to donate the stock itself. By selling it first, your gain counts as income, and it might affect your total taxes. By donating it, you don't recognize any income. If you do want to contribute stock to a charity, give your target organization a jingle. It'll probably be thrilled and is likely to help you make arrangements.
As with all tax-related issues, you always have details to consider that relate to your particular situation. You'd be well advised to consult a tax professional, in addition to a Fool.
This article was originally published on Dec. 4, 2006. It has been updated.