Question: I regularly give money to various non-profits. Recently, I saw something about giving stock instead of cash. How does that work and what is the benefit to me or the charity?
Answer: The non-profit organizations in Monterey County do tremendous work building and strengthening our communities, but they could never do it without your support. Thank you for making a difference.
One of the great side benefits to philanthropic giving is the ability to deduct the value of your charitable gifts from your taxes. When done correctly, you can magnify the tax benefits of charitable giving by donating appreciated shares of common stock, mutual funds or exchange-traded funds instead of cash.
Here’s how it works.
When you give stock as a gift, your original cost basis transfers to the recipient. If the recipient is a tax-exempt organization, it can sell the donated shares without paying tax on the capital gain. You as the donor get a tax deduction equal to the full market value of the donated stock and you completely avoid paying tax on the capital gain. If you really like the stock you donated and want to maintain your position, you can replace the donated shares using the cash you would have otherwise donated to the charity.
You need to keep three things in mind in order for this strategy to work properly. First, make sure your donation is going to a qualified non-profit and that the non-profit provides you with a “contemporaneous written acknowledgement” of your donation. The acknowledgement must include 1) a description of the property you donated, 2) whether you received any goods or services in exchange for the donation, and 3) an estimate of the value of your donation. Without this acknowledgement, you will not be able to deduct your donation.
Second, donate stock only if it has appreciated in value. The benefit to the strategy comes from avoiding the tax on the capital gain. If the stock is trading at a loss, you are better off selling the stock and donating the proceeds of the sale. You will still be able to deduct the charitable contribution from your taxes and you will be able to use the realized capital loss to offset future capital gains.
Third, donate stock only if you have held it for more than one year. If you donate stock held less than one year, the IRS limits your charitable deduction to your cost basis in the stock, not the full market value. Your financial advisor should be able to help you identify which of your stocks are prime candidates for charitable donations.
The IRS allows the donation of other types of property, as well, but the rules governing tax deductions differ depending on the kind of property involved. For a complete rundown, check out IRS Publication 526: Charitable Contributions. You can get it online at www.IRS.gov.
You will also want to work with your intended charity to understand their procedures for receiving donations of appreciated assets. Not all non-profits are in the position to accept all types of assets, though most are able to accept appreciated stock. The Community Foundation for Monterey County accepts a broad array of asset types including, cash, stock, real estate, collectibles, and even oil and gas rights.
Steven C. MerrellMBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to firstname.lastname@example.org.