If you are planning to make a substantial contribution to a charity, it’s better to donate appreciated stock from your investment portfolio instead of cash. Why? You get a deduction for the donation AND avoid tax on the appreciation in value of the donated property.
This planning tool is derived from the general rule that the deduction for a donation of property to charity is equal to the fair market value of the donated property. Where the donated property is “gain” property, the donor does not recognize the gain.
Example: You want to make a $20,000 donation to charity. You own $20,000 worth of stock held long-term (i.e. for more than a year and a day) with a basis of $5,000.
- Option 1 – Sell the stock and donate the $20,000 cash. You get a $20,000 charitable deduction but must report the $15,000 capital gain on the stock. Absent losses to offset the gain, the gain will be taxed at
- 20%, or
- 8% – depending on your tax bracket.
- Option 2 – Donate the stock directly to the charity. You get the same $20,000 charitable deduction and avoid any tax on the capital gain.
Note: this plan will not work if the stock has been held short-term (i.e. for less than a year and a day). In this case, the charitable deduction would be limited to $5,000 (the stock’s basis).
For taxpayers who will now be taking the standard deduction, consider making a stock gift to bunch deductions so you can itemize in one year and alternate taking the standard deduction in the next. Donating stock is a great way to increase your tax benefits and the organization will be just as happy to receive the stock.