Summary: Both you and your favorite charity can benefit when you donate stock (instead of cash).
It is not uncommon for people to give to charitable organizations during the same year when they also realize long-term capital gains from the sale of appreciated stock (shares that have increased in value). This is especially true when the stock market has a good year. One often overlooked way to give to your favorite charity is to donate stock (rather than cash). If done right, this can allow you to give more to the charity (at little or no additional cost to you), while at the same time allowing you to take a greater tax deduction, reducing your tax bill. I should point out that this treatment is only allowed if the stock has been held longer than one year.
The benefits from giving stock (instead of cash) arise because the U.S. tax code allows taxpayers who donate stock to exclude the stock’s gain from income, while still claiming the entire appreciated value (including the gain) as a tax deduction. For appreciated shares, a taxpayer would normally have to pay tax on the gain. However, if the taxpayer does not sell the stock, but rather gives it to a qualified charitable organization, nobody pays taxes on the gain. The taxpayer does not recognize the gain as income, and therefore pays no tax. The charity does not pay tax when it receives the stock, because it is tax-exempt. So, instead of paying part of the gain to the U.S. Treasury, the taxpayer who donates stock is free to pass this tax savings along to the charity. (Note: Churches and other entities defined by the IRS as tax-exempt organizations can also benefit from this strategy. Also, the IRS allows similar treatment for other types of appreciated property.)
Here is an example to make it more clear. Let’s consider a taxpayer who paid $1,000 five years ago for stock worth $10,000 today. Selling the stock would trigger a $9,000 gain, which would be taxed at the prevailing long-term capital gain tax rate. If the tax bill is $1,350, the net after-tax proceeds would be $8,650 ($10,000 minus $1,350). For ease of illustration, let’s assume the taxpayer plans to give the full amount ($8,650) to charity. The charity benefits by $8,650. The taxpayer would claim a deduction of $8,650 on his or her return, lowering taxable income by this amount.
Alternatively, if the taxpayer were to donate the same stock instead of selling it, nobody would pay tax on the stock’s gain. The charity would receive $10,000 in stock tax-free ($1,350 more than if the stock were sold and the after-tax proceeds were given). The taxpayer would claim a $10,000 deduction on his or her return ($1,350 more deduction than if the stock were sold and the after-tax proceeds were given). It’s considered a double-dip of sorts, because the taxpayer both claims less gross income while also claiming a higher deduction. The charity benefits. The taxpayer benefits. The only party not benefiting is the government.
Why would the tax code allow this? I think it is because lawmakers intentionally want us to give more to charitable causes. A nation that gives is a nation that receives. Why don’t more people give stock? It may be that people are more prone to reading War and Peace (1,296 pages) than the U.S. tax code (74,608 pages). Or it could be that many charitable organizations don’t yet have a brokerage account. To receive stock, the organization needs an account that can receive shares. Such an account is relatively easy to open, so if you are considering a sizeable gift of stock, ask the treasurer of your organization about the possibility of giving stock.
Lastly, I’m no longer a practicing CPA, so while I want to pass along helpful information, please bear in mind that I’m not in the business of rendering tax advice, nor do I intend this article to be construed as tax advice. IRS Publication 526 includes information regarding charitable contributions. And be sure to check out the IRS’s Tips for Year-End Gifts to Charity. As with all tax strategies, the rules are complex. So please consult with a licensed tax practitioner before doing anything drastic.