Donating appreciated stock and mutual fund shares offers a highly effective way for higher-income investors to not only reduce their taxes, but to give more to the causes and communities that are important to them.
Let’s take a closer look at how it works, starting with the tax benefits. As with most charitable contributions, donors are able to deduct the full fair market value of their gift from their taxable income. But perhaps even more compelling, especially with higher capital gains tax rates on the horizon, is the opportunity to avoid paying the long-term capital gains taxes – which apply to investments held for more than one year – that would be due if they simply sold the stock.
In the case of highly appreciated assets, these tax savings may actually exceed the amount initially paid for the investment. This creates the ability to give more. By donating stock, some donors may actually be able to give 20 to 40 percent more than if they sold the stock, paid taxes on their profits, and then made a donation.
Assume you invested $1,000 in Apple five years ago and today your stock is worth approximately $5,000. If you sold the stock, you would have to pay capital gains tax on the $4,000 gain. With current capital gains tax rates at 15 to 30 percent (depending on your income and where you live), that means you would owe between $600 and $1,200 to the IRS. But if you donated your Apple shares, you would avoid those taxes altogether and also be able to deduct the full value of your $5,000 gift from your taxable income.
Rebalance Your Portfolio
There’s one more potential advantage associated with donating stock. By selectively donating highly appreciated stock or mutual fund shares, it’s possible to periodically “rebalance” your portfolio. This is a great way to help ensure that your investments are adequately diversified and properly aligned with your investment objectives and risk tolerance over time.
Considering all of these benefits, it’s surprising how few people actually choose to donate stock. According to a study compiled by GivingTuesday, fewer than 6 percent of donors give stock. Excluding those who give through Donor Advised Funds, we estimate that only 1 to 2 percent of donors actually give stock directly to charity. Most simply aren’t aware of the opportunity; others assume the process is too complicated and time-consuming.
Donating Stock to a Nonprofit
Though that may have been true at one time, it’s no longer the case today. Savvy nonprofit organizations are increasingly coming to recognize the benefits of making it easy for their benefactors to donate stock and there is considerable evidence to support this shift. According to one study, nonprofits that received both cash and securities gifts were able to grow contributions over a five-year period at a rate five times greater than those that received only cash gifts. With stock donations, you are giving charities more, in terms of value, without increasing the amount given, in terms of out-of-pocket cost. This can make an even bigger impact and can allow more flexibility on the part of the charity.
- Avoid capital gains tax. Donations of stock are exempt from capital gains taxes that might be applied if your stock value has grown since you bought it.
- Receive federal and state income tax deductions.
- No credit card fees placed on the charity! While many donors choose to cover the fees, many do not! Every little bit helps support a charity’s mission.
- With benefits on your taxes, you might be in a position to consider a larger donation.
- Larger investments help stabilize nonprofits and can allow for sustainable growth.
You might be surprised to learn how easy it is! Many charities include stock transfer information on their website. If they don’t, you can contact the charity or your financial advisor for more information.
It seems clear that donating appreciated stock is a winning proposition for both donors and nonprofit organizations. But more importantly, by encouraging and increasing charitable contributions, it offers the promise of better serving the people that rely on the philanthropic community.
Written in partnership with Andrea Young, Co-Founder & CEO of DonateStock. Andrea is an entrepreneur, mentor, investor, and seasoned CEO. With more than 20 years of business development experience, Andrea is passionate about start up business and an advocate for social impact. Andrea currently serves on numerous boards in Houston, Texas. Andrea can be reached at firstname.lastname@example.org and on LinkedIn.
Disclaimer: The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, please consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.