When making charitable donations, many people automatically pull out their checkbook or credit card. It’s certainly the quickest and easiest way to donate. They may also assume the charity won’t accept other types of donations — such as stock — or that the process involved with donating stock is more complicated than it really is.
Realistically, however, donating stock can provide several financial benefits to both the donor (the individual) and the donee (the nonprofit organization) compared to just writing a check or using a credit card. And the stock donation process is actually not as complex as many people assume. Yes, it takes a little more time — but it’s not complicated.
The extra effort may be worth it: If you give stock to a nonprofit, you can deduct the fair market value of those donated shares from your taxable income — just as if you donated cash. Additionally, you get the benefit of not having to pay capital gains tax on the appreciation of the stock’s value since you bought it.
Here’s a simple example: Let’s say you paid $10 a share for 100 shares of a stock five years ago — meaning you paid $1,000. Today that stock is worth $50 a share — or $5,000. You would typically have to pay long-term capital gains tax on the $4,000 in growth once you sell that stock. But by donating those shares to a 501(c)(3) nonprofit instead, you don’t have to pay that long-term gains tax and you still get to deduct the fair market value of the stock on your personal income tax return — in this case, $5,000. (Keep in mind that only people who itemize their tax deductions can claim a deduction for charitable donations; people who take the standard deduction cannot.)
Other potential benefits to stock donations: Many nonprofits will sell any donated stock but do not charge donors the transaction fee for that sale. The nonprofit may benefit because you might make a bigger and more frequent donation when you give stock than if you give cash due to the appreciation of your shares and the tax benefits you might realize. Moreover, the nonprofit also doesn’t have to pay the capital gains tax when they sell the shares, thanks to its tax-exempt status. Therefore, they can use the funds that would otherwise go to the IRS towards their mission.
The key steps
When donating stock to a nonprofit, it’s important to think long-term and make it part of an overall comprehensive plan. You certainly don’t want to donate stock that you might later regret giving away. Rather, it should be stock that you would otherwise likely sell in the near future as part of your overall investment strategy.
Here are the key steps of the stock donation process:
Start early. It can take a couple weeks to make a stock donation to charity, since you will have to fill out forms and contact your investment advisor to have them transfer the shares directly to your chosen nonprofit. So it’s a good idea to start the process well before December 31 if you want to make a donation and get a deduction for the current calendar year.
Look for highly appreciated stock. It’s most beneficial to donate stock that has risen in value significantly since you bought it and you have held the stock for 12 months and a day or longer. That’s because you won’t pay capital gains tax on that appreciation. Thanks to the strong overall market returns in recent years, many investors today have highly appreciated stock in their portfolio. A financial advisor can help you evaluate your portfolio and identify stocks that may be a good candidate.
Select and contact the nonprofit. Most charities — particularly large ones — will accept stock donations. And even if they don’t explicitly say they do, it can be worth reaching out and letting them know you’d like to donate stock. They might accept it if you ask.
Collect the right documentation. Once you make the donation, the nonprofit should send you a letter confirming the donation was made and the date of its receipt. This letter is important because your donation will be valued on the day the charity received the stock. You should give that letter to your accountant or tax preparer. Keep in mind that the total amount you can deduct in stock donations each year is lower than if you donated cash. You can deduct up to 50 percent of your adjusted gross income (AGI) for cash donations on your annual tax return, but you can deduct only up to 30 percent of your AGI for stock donations each year.
Using a Donor-Advised Fund
If you’re interested in donating stock this year but don’t have a nonprofit in mind, consider setting up a donor-advised fund (DAF). These are charitable-giving vehicles that allow you to donate now and earn a tax deduction for the current year, but delay designating the nonprofits that receive those donations until you’re ready. DAFs generally accept many types of assets — including stock along with a wide variety of other assets — as donations and allow you to keep the money invested until you designate the nonprofit you want to donate them to. Moreover, many DAF providers offer donors help in researching nonprofits along with detailed recordkeeping. They also typically allow you to make donations anonymously, if you so choose.
One thing to keep in mind: You can’t change your mind once you’ve made a donation to a DAF, as the gifts are irrevocable.
Donating stock can be a smart way to combine your philanthropy with your financial planning and investing strategy. Your First Republic advisor can help you evaluate whether donating stock makes sense for you and explain how to do it most effectively.