Donate to Do Good: It’s A Win-Win!

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Whether it’s dropping your contribution into the collection plate or writing a check during a fundraising campaign, you’re very familiar with giving money to charities. But did you realize you could also be donating shares of stock?

The concept is a huge reward for the nonprofit and also for you when it comes to taxes. For the vast majority of donors, giving stock allows you to save on taxes by avoiding capital gains and by allowing you to take a potential income tax deduction.

“It’s typically more advantageous to donate stock (as opposed to cash) to charities. Both cash and stock donations to 501(c)(3) public charities are tax deductible,” shared Whitney Hosty, Greater Kansas City Community Foundation and Greater Horizons, Chartered Advisor in Philanthopy® with nearly 20 years of experience working with individuals, families and corporations to support their charitable giving. “But when you donate stock that you’ve held longer than one year, you can avoid long-term capital gains tax.”
Here’s an example from Whitney. Let’s say you buy $2,000 worth of shares of a publicly traded stock. You hold that stock for at least one year, and the value increases to $25,000. If you sell the stock, then you’ll have to pay taxes on the increase, or capital gain, which in this scenario is $23,000. But if you donate the stock, you don’t have to pay taxes on the gain. So, when you compare the tax savings of donating $25,000 in stock to $25,000 in cash, there’s a big difference, thanks to the long-term capital gains you avoided.

What are the benefits?
“As the donor, you can be eligible for the tax benefits of stock donations to any 501(c)(3) public charity,” commented Whitney. “When a donor sells the stock and then donates the proceeds, as opposed to gifting the stock, the donor often subtracts the amount of the capital gains tax from the total donation, meaning the charity might receive a larger donation if it’s a gift of stock.” Don’t forget to consult your tax advisor, who will review the tax savings you could enjoy by donating stocks. And don’t wait until the end of the year. This decision is an important one and shouldn’t be rushed.

She also counsels to consider gifting your stock to a donor-advised fund, which is an investment account for your charitable dollars, administered by a public charity. Many communities offer a foundation to assist donors in establishing and using donor-advised funds for charitable donations, which are quick and easy to set up with one simple form. Contributions to donor-advised funds are tax deductible, and the assets you contribute to your donor-advised fund are invested. You can then use the donor-advised fund to give to any public charity in the country, including schools and religious institutions. In any of these scenarios, you should research the group you are considering to receive your gift. Don’t forget to check with your financial advisor; many investment companies offer a donor-advised fund.

“When you donate stock to a donor-advised fund, we’ll sell the stock upon receipt, the proceeds are invested and the growth is tax free. You can then use the proceeds and investment gains for donations to multiple charities over time, instead of choosing just one charity to receive the proceeds in a one-time donation,” advised Whitney. “You can also take your time deciding which organizations and causes you want to support. Many of our fund holders appreciate this flexibility as they consider how they would like to impact the needs and organizations in the communities they care about. By separating the tax-deductible stock donation from their support for important community organizations, they are able to be more thoughtful and strategic with their philanthropy.” Whitney also points out that those who choose to open a donor-advised fund at a community foundation can call upon resources and expertise on community needs through its philanthropic advisors.

Do I Need a CPA?
Donating stock to charity is a simple process, as long as the charity has the capacity to accept stock gifts. Smaller or more grassroots charities may not have this capability, so contact the charity and ask for their instructions for contributing stock. If the organization has an account set up, your financial advisor can help you initiate the transfer to the charity. If the organization doesn’t have this capacity, you may want to consider opening a donor-advised fund to receive the stock. Once it’s sold, you can use the stock proceeds to make a donation to the organization from the donor-advised fund. Although a CPA is not needed to walk you through the process, she can provide valuable advice on the tax aspects of the donation. Your CPA can also run different tax scenarios to determine the savings you may realize with a stock donation.