Are you hesitant to sell your appreciated stock because of the hefty capital gains taxes? If you’re charitably minded, there’s a strategy that can preserve your cash reserves, reduce your tax liability, and help you avoid capital gains at the same time. What’s the strategy? Donating some or all of your appreciated stock to your church, charity, or nonprofit of choice.
How does this work? When you donate all or part of your appreciated stock, you’re able to deduct the fair market value (the current value) of the stock from your taxable income in that year, thus saving you money. You avoid capital gains tax—and you get a tax benefit for the donation.
How to Donate Stock
Now here’s how you do it:
- Total Your Deductions. For the gift to be tax deductible, you’ll have to itemize your deductions on your tax return, so add up your charitable gifts (along with the stock) and other eligible deductions to make sure you’re giving over the standard deduction. If needed, call your CPA to determine how much you need to give this year to make it worthwhile. Of course, you can give even without the tax benefit—but I’m sure I speak for all of us when I say that I won’t turn it down!
- Contact the Recipient. Contact your church, charity, or non-profit to confirm they can accept appreciated stock. (If they don’t, this is a great time to encourage them to set this up.) Ask the charity for their organization’s brokerage account number. You’ll need this so you can seamlessly transfer your donation over to their account once you determine what you’ll be donating.
- Decide Which Stock to Donate. Go into your brokerage account. Look at appreciated stock that you’ve held for over 365 days. How do you know which stock to give away? Take a step back and look at a few things. I’d pick the stock that’s had a nice run accruing a lot of capital gains, but you feel it’s at a plateau or peak. Determine what the P/E Ratio and Forward P/E Ratio is. (The regular P/E ratio is the current stock price over its earnings per share. The forward P/E ratio is a current stock’s price over its “predicted” earnings per share. If the forward P/E ratio is higher than the current P/E ratio, it suggests decreased expected earnings.) Also, speak to vendors, customers, and even employees to hear their opinions about the company’s future. I’ve heard many times where they knew the writing was on the wall that a company was losing its competitive edge. All of these are signs to take note of.
- Make the Transfer! There are several ways to transfer the stock. Some nonprofits have stock donation transfer website pages where you can find information on how they prefer to receive the stock. Otherwise, go into your brokerage account, click on the stock, and select the transfer option to donate all or some of the shares. This is where you use the nonprofit’s brokerage account number you asked for earlier to ensure the stock is transferred to the right place. Another option—if your brokerage allows—is to manually fill out a stock transfer form to complete the transaction. Then send the form to your broker to initiate the transfer.
Stock Donation Tips
There are some nuances with donating stock you’ll want to know:
- The appreciated stock must be donated to a qualified charitable organization, which must be a 501c 3 organization for you to get credit for this donation.
- You must have owned the stock for at least one year to be eligible for long-term capital gains, so prioritize long-term holdings for your stock gifts.
- Keep records to substantiate your donation. I’ve witnessed many clients who didn’t have the paperwork at the end of the day and were not able to prove that they donated the stock. In the year you donated the stock, keep a record with your tax files of the fair market value of the stock when you sold it and the receipt from the charitable organization. Your church, non-profit, or charity of choice should send this to you. Just for safe keeping—but not necessary—I would also retain a copy of how much you paid for the stock, too.
- When you file your tax return, report the stock donation on IRS Form 8283 and provide it to your tax preparer. This is where all the paperwork you saved comes in handy! You can generally only deduct up to 30% percent of your AGI or adjusted gross income with appreciated stock. If you give more than the 30%, don’t worry! The great thing is you can carry the remaining amount forward to use in future years—in fact, up to five years after.
So that’s how to give away appreciated stock to a charitable organization. When you donate stock, you’re actually giving 20% more than if you sold the stock, paid capital gains tax, and then donated the remainder. You’d be surprised how many people have appreciated stock but have never considered donating it to their church, charity, or nonprofit of choice.
If you’re on the fence about this, consider the words of Jesus in Matthew 10:8, “Freely you have received; freely give.” King David prayed similarly after making a gold offering to God, “For all things come from you, and of your own have we given you” (1 Chronicles 29.14). Everything you have, God has given to you for his glory. So store up treasures in heaven through generosity. Give out of what he has given you.
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