7 MIN READ
We all know claiming charitable contributions on our taxes can benefit both donors and recipients. An appreciated stock donation is an excellent choice because it can appreciate over time, maximizing the potential benefit for your recipient and the tax benefits for you.
Related Article | The Finance Dictionary: Learn the jargon your Finance friends speak!
What Are Stocks?
A stock is a type of security that gives stockholders "ownership" of a portion of a company. They're an excellent way to build individual wealth and facilitate company growth, especially long-term.
Donating Stock to Charity
When you donate stock to charity, you're simply transferring ownership of a stock to that charity. In most cases, you'll do so through their brokerage firm, and it's a simple matter of transferring instead of selling.
If you've ever sold stocks before, donating shouldn't be difficult. There are some risks and benefits to be aware of, though, so you should take time to consider all angles before choosing which stocks to donate and where.
Benefits of Donating Stocks
Donating stocks has benefits for both donor and recipient. Before you choose your charity, though, make sure you're aware of all the reasons why donating is such a great idea.
1. They Maximize Your Gift
On average, a typical stock returns about 10% in dividends each year, or 7-8% after inflation. This means a stock is a great way to give your chosen organization a gift that keeps on giving.
2. They're Tax-Deductible
You can deduct the total amount of your stock donation from your taxable income when you file your taxes, giving you a larger tax return and tax savings.
3. You'll Avoid Capital Gains
Capital gains tax is applied to any income you make on your stocks. If you donate your stock instead of selling it, your recipient will receive more money, and you won't receive a tax hit.
4. It's Easy to Do
Donating stock to charity is easier than you might think. You'll need to fill out a form or two, and then your donation will be on its way.
Related Article | When To Sell ESPP Shares For Tax Benefits
What to Consider When Donating
There are several things you should consider when donating stocks to charity. In particular, you should keep the following in mind:
- Limitations on donated stock
- Timing of your donation
- Appreciation of your stock
- Market value
Tax Deduction Limitations for Donated Stock
Donating your stocks will provide you with several tax benefits. However, there are also a few limitations you'll run into.
Donating Before Selling
You should avoid selling your stock before donating. Although a cash donation might seem like a better idea due to its simplicity, there are more benefits to a direct donation. Your best bet is to transfer the stocks directly to your recipient.
Restricted Stock Rules
Restricted stocks are given to executives and are non-transferable. If the stock you want to donate is considered "restricted," you'll likely need to get permission from your company's lawyers before you can transfer the stock.
Avoid Pre-arranged Sales
Don't make a deal with your recipient that they'll sell the stocks once you transfer them over. Doing so can and will eliminate any tax benefits either of you might see. In most cases, charities will sell the stocks right away, but they're technically allowed to do so whenever they see fit.
When Not to Donate in the Form of Stocks
As with selling and trading stocks, you should follow a few specific rules when you decide to donate your stocks to charity.
Don't Sell When It's Low
When it comes to offloading your stocks, there's always a right time and a wrong time to sell or donate. Since donating stocks requires selling and transferring the stock, you'll only want to donate when stock prices are high. On the other hand, if your stock has taken a significant dip recently, you should hold off on donating.
In addition, you'll also want to avoid any stocks that can cause drawbacks to your deductions. Specifically, publicly traded partnerships often put more tax burden on donors than non-partnerships.
Don't Sell Too Soon
When you purchase a stock, it's essential to let it appreciate before selling. For that reason, you shouldn't donate any stocks you've held for less than one year.
Related Article | 5 Things to Know About Your Restricted Stock Units
IRS Regulation When You Donate Stock to Charity
If you're anything like me, you likely cringe at the term "IRS regulations" regarding donations and deductions. Yet, claiming your deductions should be an easy task, right?
Although it's not difficult, per se, the United States Internal Revenue Service has very specific steps when it comes to donating stocks to charity.
1. Choose a Qualified Organization
Any donation you claim on your taxes will need to be to a qualified organization. You can't donate to an individual or group that doesn't fall under the umbrella of eligible organizations if you plan to claim your donation as a deduction. You can find descriptions of qualifying organizations on the IRS website.
2. Fill Out Your Forms
When you claim your stock donation on your taxes, you'll need to fill out IRS Form 1040. Then, if your non-cash contributions exceed $500, you'll also need to fill out Form 8283. You can find every IRS form you'll need in the "Forms & Publications" section on the IRS website.
3. Deduct Benefits
Sometimes when you donate to a charity, you'll receive a benefit as a "thank you." It could be a baseball hat, t-shirt, or some type of service. If that's the case, you'll need to factor that in when writing your deduction. You can only claim the stock amount that surpasses the benefit's fair market value.
4. Determine Your Donation's Market Value
The IRS has specific rules for calculating the market value of your stock. You'll have to determine the market value yourself, so it'd be good to read up on IRS rule 561 to understand how to do that.
Related Article | Can I Use Restricted Stock Units (RSUs) To Qualify For A Mortgage?
Donating stock to charity might seem tricky, so here's a bit more information if you still have questions.
Is It Better to Donate Stock or Cash to Charity?
Stocks benefit both the donor and recipient in ways you simply don't get with cash. Specifically, recipients benefit from a gift that can appreciate over time, and donors won't have to pay capital gains tax on their stocks.
How Do I Give Stock to a Charity?
Charitable giving through stock is a relatively simple process. It's a simple matter of contacting the charity to confirm they'll take donated stock, filling out a few forms, and sending them to your brokerage firm.
How Much of a Stock Donation Is Tax-Deductible?
The amount of a stock donation that's tax-deductible depends on a few things. However, a charitable deduction is generally limited to 50% of your adjusted gross income.
Additionally, donating appreciated stock and other long-term assets are usually exempt from capital gains taxes and are eligible for an income tax deduction.
How Do I Transfer Stock for Donations?
Many charities will have a brokerage account they use to accept stock donations. So, first, contact the charity you want to donate to and find out which firm they're with. Then, you can direct your donation from your firm to theirs.
What Are the IRS Stock Donation Rules?
You don't have to worry about jumping through too many hoops when donating your stock to charity. Instead, fill out the requisite forms and ensure you've correctly calculated your stock's full fair market value when you pay taxes.
What Is the Difference Between a Charitable Organization and 501c3 Status?
A 501(c)3 is a nonprofit organization that's exempt from federal income taxes and aims to benefit members of an organization. Any profit it makes must go directly into the betterment of the organization. A charitable organization exists strictly to donate to a separate cause from the charity.
What Happens When You Donate Stock?
Your brokerage firm will transfer the stock directly to your chosen charity when you donate stock. Once the transfer is complete, the charity will sell the stock and direct the funds to their cause. Then, you'll fill out your forms at tax time and get your tax deduction.
Donating stock to charity might sound like a complex process, but it's a great way to help fund a good cause while reaping tax benefits. Just make sure you follow all the rules laid out by the IRS, and you'll be all set. Talk to a professional for specific tax advice.