If you make substantial donations to non-profit organizations like charities, churches, synagogues, and shelters then you should strongly consider donating appreciated stock instead of cash. Aside from claiming the charitable giving deduction, you can also avoid paying capital gains tax on the appreciated stock that you donate.
This is best illustrated with an example. Suppose your adjusted gross income is $100,000 and you are married filing jointly in the 25% tax bracket. A $10,000 cash donation qualifies you for the charitable giving deduction and saves you $2,500 (0.25 X $10,000) on your tax bill. But suppose you have some Amazon (AMZN) stock that has skyrocketed from $2,000 to $10,000 and you’ve held the stock for greater than 12 months. If you were to sell the stock to make the cash donation, you would be responsible for a 15% long-term capital gains tax bill of $1,200 ($8,000 gain X 0.15). However, if you donate the stock then you can claim charitable giving deduction for the full appreciated amount of the stock ($10,000) and also avoid the $1,200 capital gains bill. Thus, your total tax savings is $3,700 from your original donation amount:
|Charitable Giving Deduction Tax Savings
|Capital Gains Savings from Donated Stock
But what if you want to continue holding the stock because you are the world’s biggest Amazon fan? Take the cash you would have originally donated and purchase new shares to replace the ones you donated. Thus, your new cost basis will be at the current market value with zero capital gains.
How to Value Your Donation
The value of your stock donation can be found by taking the average of the high and low trading prices for the day that the donation transfer is completed. I use the historical price information from Yahoo Finance here. For example, on Dec 22nd 2017 the high for AMZN was $1,174.62 and the low was $1,167.83. Thus, the average is $1,171.23. Multiple that times the number of shares transferred and that will be the total amount you can deduct from on your tax return.
When to Donate Cash
- You don’t have stock or
- You have stock with gains but you have held the stock for less than 12 months or
- You have stock but don’t have unrealized gains (meaning you’ve lost money). In this case, it’s actually better to sell the stock for a loss and donate the cash. The capital losses can be used to offset other capital gains from the year or can be used to deduct up to $3,000 per year (remainder can be carried forward to the next year).
When to Donate Stock
- You have appreciated stock held for longer than 12 months and you plan to itemize deductions on Form 1040, Schedule A.
Tips from Personal Experience
Here’s a few tips from past experience:
- Ensure you’ve held the stock for at least 12 months. The first time I attempted this with Apple stock I donated shares that I had held for less than 12 months. While I still avoided paying short-term capital gains, my charitable giving deduction was reduced to the price I originally purchased the shares for. Using the AMZN example above, your total tax savings would be reduced from $3,700 to $1,700!
- Don’t procrastinate. The end of the year is an extremely busy time for brokerages and you don’t want to risk the chance that your donation isn’t completed before the end of the year. I’ve seen delays of up to 2 weeks when mailing or faxing forms. One trick that works really well for Fidelity is go to their local office and submit this form in person. Each time I have done this I’ve seen the transaction executed within 2 days (your mileage may vary).
- Give your stocks more time to appreciate by donating towards the end of the year. The absolute best time to donate your shares is when the stock price is the highest during the year. Since I don’t have a crystal ball to time the market, I fall back to the maxim that the stock market generally goes up over time. Thus, the best time is near the end of the year.
- Coordinate with the non-profit organization. Confirm in advance that they have an account at your brokerage institution and that they accept stock donations. Once the transfer is complete, check with the non-profit to confirm that they received your shares. They should mail you a receipt acknowledging the shares that were transferred. The confirmation will include the number of shares but not the valuation. You’ll need to do that on your own (see section above).