Headerlg ask an advisor

Can Gifting Stock Reduce My Tax Bill?

  • By Jocelyn Black Hodes, DailyWorth’s Resident Financial Advisor
  • October 15, 2013

Are there tax advantages to donating stock to charities rather than cash?

While donating cash to charities is most common, investors can get more bang for their charitable bucks by gifting stock instead. Either strategy can help reduce your income taxes, as long as you itemize your deductions on your federal income tax return. How much you save depends on your tax bracket, but gifting stock can offer the additional benefit of avoiding capital gains tax on long-term (more than one year) appreciation. 

For example, let’s assume you donate $1,000 to charity and you are in the 28 percent marginal tax bracket. You would save $280 on your income taxes that year. If you donated $1,000 of long-term appreciated stock that you originally paid $200 for (aka “cost basis”) and were in the same tax bracket, you would save $280 plus $120 on capital gains ($800 x 15 percent) for a total tax savings of $400. If you were in the highest tax bracket, you would save even more by avoiding the Medicare tax on investment income, which is 3.8 percent.

Keep in mind that this is only a hypothetical example. Actual tax benefits will vary based on your particular financial situation, type of property donated and type of beneficiary organization. Also remember that the amount you can claim for a charitable gift of stock is its fair market value on the date you make the gift and that you can donate up to $14,000 this year per recipient ($28,000 per couple per recipient) without subjecting yourself to the gift tax.

Donating appreciated stock that you have held less than one year (aka “short term”) does not make sense since you will only be able to claim your cost basis as your charitable gift. Similarly, donating depreciated stock is wasteful since you could sell it, donate the proceeds and then claim the losses on your tax return for additional tax savings.

Besides the tax benefits, there are other reasons you might want to consider donating stock rather than cash. These may include reducing a concentrated holding in your portfolio of a particular stock (and thereby reducing risk), making a larger donation than you could make in cash or keeping your cash on hand for other purposes. 

Before making a donation of stock, you should make sure that the recipient is an IRS-approved non-profit organization and that the organization is capable of receiving gifts of stock (your broker can assist with the required paperwork). You should also be aware that the IRS has limits on how much you can donate based on your adjusted gross income (AGI). 

Lastly, if you are passionate about philanthropy and have at least $1,000 of stock to donate, you might want to consider opening a “Donor-Advised Fund,” which is offered by many big financial companies and some charities themselves. This allows you to build up a dedicated charitable account that you can use to make grants as you see fit. Think of it as your own mini foundation. Your initial contribution to the fund (and any subsequent contributions) would count for a tax deduction and be invested to hopefully grow in value, which could potentially increase the amount of your future charitable gifts.

It is always a good idea to consult your financial advisor and/or tax professional to learn more about charitable giving options that are most suitable and beneficial for you and to maximize your potential savings.

You Might Also Like:
Ask an Advisor: Is It Better to Be Paid in Shares or Cash?
Ask an Advisor: Am I Invested in Ethical Companies?
The #1 Tax Problem You Don’t Want