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How to Donate Appreciated Stock

Posted By Jim On 12/28/2009 @ 7:54 am In Taxes | 12 Comments

It’s well understood that when you donate $100 to an eligible charity, you get a $100 tax deduction if you itemize your deductions.

What happens when you donate $100 in stock to an eligible charity? The exact same thing. You get a $100 deduction to your taxes if you itemize your deductions.

If that’s the case, why is donating appreciate stock such a big deal? It’s a big deal because the stock didn’t cost you $100, it cost you less than that but you get to deduct the full value as a charitable donation on your taxes. The charity gets a sizable donation, you get a nice tax deduction, and everyone wins. Well… not everyone. The only loser in this entire transaction is the United States Treasury.

Should You Donate Stock?

There are a few questions you need to answer for this strategy to make sense:

  1. You need to be in the 15% federal income tax bracket [3] or higher,
  2. You need to itemize your deductions,
  3. You need to confirm that the charity is a registered 501(c)(3) non-profit.
  4. You must have owned the stock for more than one year.

If you answered yes to the first two, then this strategy makes financial sense to you. If you also answered yes to the second two then you’re in business. All you have to do is call up your charity and ask them what the procedure is for donating stock.

Sell & Donate or Donate Stock?

Let’s say you bought 100 shares of Bargaineering at $100 a share (it’s expensive!) two years ago. Today, the stock is worth $150 a share, so you have gains on paper of $5,000. If you were to sell the shares of stock, you would have to pay long term capital gains tax on the profits. If you assume that’s 15%, you walk away with $14,250 (15% off the $5,000 profits, plus your original $10,000). If you were to donate it, you would get (assuming 25% tax bracket) a deduction resulting in a $3,562.50 reduction in taxes. The $14,250 donation would have cost you $6,437.50.

Let’s say you were to donate the $15,000 in appreciated stock instead of selling it. You get a $15,000 deduction which, assuming you are in the 25% tax bracket, results in a $3,750 reduction in your taxes. You get the full value of the donation while the real “cost” to you is much less. The $15,000 donation only cost you $6,250 (original $10,000 minus the $3,750 reduction in taxes) out of pocket.

To donate directly, which would cost you less in time in preparing your taxes, allows you to give more at a lower cost. The only player being cut out of the process is the Treasury.

This strategy becomes more powerful when stock has appreciated a significant amount or when you enter the higher tax brackets. It will probably never be more profitable to donate than to sell but if you routinely donate cash, doing so with stock will lessen the financial burden (which means you can give even more).

You still have a couple days… please consider it.

(Photo: howardlake [4])


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[3] 15% federal income tax bracket: http://www.bargaineering.com/articles/2009-federal-income-tax-brackets-projected.html

[4] howardlake: http://www.flickr.com/photos/howardlake/2969641664/sizes/s/

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