If you own stocks, mutual funds or exchange traded funds outside of a retirement account, you and your favorite charities can benefit if you give shares directly to the charity. This month we talk to financial planner Michael Gorman about the benefits of donating appreciated stock and the simple steps such a donation requires.
Q: What are the tax advantages of donating appreciated stock?
A: If you were to sell stock you own and then donate the proceeds to charity, you would pay tax on the stock’s capital gains. If you’ve held the stock for more than a year, when you give shares directly to charity, you can deduct the full market value of the stock or fund. (If it’s been less than a year, your deduction is limited to the cost basis.)
The charity then sells the security and is not subject to capital gains tax, because it is a qualified charitable entity. Consequently, the charity gets the full value of the stock donation.
Q: Why is this a particularly good time to donate stocks, mutual funds or exchange traded funds?
The stock market has performed exceptionally well this year. For example, three main U.S. stock indexes closed at record highs at the end of October. As a result, many investors own stocks that have increased in value, making this a good time to transfer these stocks as a charitable donation.
Q: Can you give an example so folks can see why stock donations are a good alternative to donating cash?
A: Sure. Let’s say Jennifer would like to donate $2,000 to the Parks Foundation. If Jennifer has appreciated stock, she can make an in-kind donation of shares. Suppose she has held XYZ corporate stock for many years and the price per share is now $100, but Jennifer only paid $15 per share when she bought the stock. If she were to sell the shares to raise the money for the donation, she would incur a capital gains tax totaling approximately 24% depending on her tax bracket – about $400 in taxes.
Instead, she could give 20 shares worth $2,000 to the Foundation. She gets to deduct $2,000 from her income tax (depending on her situation) without paying a $400 capital gains tax for selling the stock. The Foundation can sell the 20 shares and net the full $2,000 without paying tax since it is a tax-exempt, 501(c)(3) entity. Of course, you should always check with your own financial advisor or tax professional before making a charitable contribution to make sure stock donations are right for your situation.
Q: How do I make a donation of stock?
A: Your broker or financial planner can arrange to transfer whatever quantity of shares you wish “in-kind” (without selling them) directly to the Parks Foundation, or any other charity of your choice. (The Parks Foundation provides details about donating stocks here.)
It is extremely important to notify the nonprofit when you donate shares. Charities receive gifts of stock with absolutely no identifying information. You must alert the nonprofit that your gift of stock will be transferred and provide your contact information so that the nonprofit can send you a letter acknowledging your gift.
Before donating, check with your tax professional to make sure you will benefit from the donation. Recent changes to tax laws may limit the amount that you can deduct as part of your itemized deductions on Schedule A of your tax return.
Q: Is there anything else donors should know?
A: There may be a variety of additional reasons why someone would want to donate stock. For example, an investor might have too much of a particular stock (a “concentrated position”) and want to divest some of it. Or an individual might have invested in a company and no longer want the stock because its prospects are not good or the investor dislikes its impact on the environment. In these examples, the investor has other valid reasons for wanting to divest a stock, and donating the stock to charity can provide tax advantages, as well.
I’ve supported charities this way myself and found it a financially wise decision that is also personally gratifying.
Michael Gorman is a Certified Financial Planner® with Creekside Partners in Petaluma. He and his wife Pat have supported the Parks Foundation for nearly a decade and are now monthly Park Pals.