Donating Stocks to Charity: How to Make the Most of Charitable Giving

Thursday, November 23, 2017

Charitable giving and tax planning should be year-round activities. But it is not unusual for people to wait until the end of the year to look for ways to save taxes. And since charitable contributions are deductible for people who itemize deductions on their tax returns, this is the time of year that many people give money to charities. For people who own appreciated stock, there is an opportunity to use the stock to make tax deductible charitable contributions and avoid the capital gains tax on the increase in the value of the stock.

Under current tax law, if you donate appreciated stock that you have owned for more than one year you can take a deduction for the value of the stock. Furthermore, you can avoid paying the capital gains tax that you would have to pay if you sold the stock and gave the cash to charity.

Let's look at an example. Assume that a married couple that itemizes deductions pays Federal long-tem capital gains at a rate of 20%, does not pay the 3.8% net investment income tax ("NIIT"), pays net state tax of 4% and wants to make a contribution of $5,000 to a charity. Further assume that they own stock for over one year for which they paid $1,000 and has a current value of $5,000.

If they sell the stock for $5,000 they will owe capital gains tax and state tax on the $4,000 gain totaling $960. But if they donate the stock to the charitable organization instead of selling it, the $4,000 increase in the value of the stock is not taxable and they are entitled to a tax deduction for the full $5,000. Therefore, by donating the stock they will save $960.

If the same couple had an income level such that they pay the 3.8% net investment income tax they would save a total of approximately $1,100. The tax calculations above are approximate and will vary based on a taxpayer's income and deductions. They are meant to demonstrate the value of donating appreciated stock.

Note that the stock that you donate must have been owned by you for at least a year and one day in order to get a tax deduction for the value of the stock.

Donating appreciated stock to a charity is a good way to help charitable organizations and avoid tax on the appreciation of the stock.