Are You Practicing Tax-Savvy Giving?
Philanthropy is an important element of life for many people, especially at this time of year, referred to as “the season of giving” by many. From volunteering your time to contributing money to a cause you care about; philanthropic efforts can take many different forms. Oftentimes, these efforts come with joint benefits, both for the people on the receiving end and for the giver, as well. When it comes to donating to charity, the experience can be deeply rewarding, not just in terms of the positive impact it has on those in need, but also due to the potential tax benefits it can offer. Donating stock is one such avenue that combines the power of giving with strategic financial planning. Below, we’ll explore the philanthropic impact and tax benefits of donating stock to charity.
The Philanthropic Impact of Donating Stock to Charity
Before delving into the tax benefits of donating stock to charity, let’s first consider the philanthropic impact, which is what drives most people anyway. A lot of people don’t realize that giving shares of stock can be a powerful way to support charitable organizations. Here’s how:
- Leveraging the Power of Compound Growth: When you donate stock that has appreciated in value over time, you enable the charity to benefit from the entire value of the stock, rather than selling it and incurring capital gains tax. This can significantly boost the charity’s resources and help them achieve their mission more effectively.
- Supporting Causes, You Care About: By donating stock, you have the flexibility to support a wide range of causes. You can align your donations with the issues that matter most to you.
- Encouraging Long-Term Thinking: Charities that receive stock donations often adopt a long-term investment strategy, which can lead to greater financial stability and the ability to plan for the future. Your contribution can help charities become more resilient and impactful.
- Inspiring Others: One of the benefits of donating stock to charity that can’t be overlooked is that you can inspire others to do the same. Your philanthropic actions can lead to a ripple effect of giving within your community, further amplifying the positive impact of your donation.
SEE ALSO: How to Gift Shares of Stock to Charity
The Tax Benefits of Donating Stock to Charity
Now, let’s explore the tax benefits of donating stock to charity, which can make your philanthropic efforts rewarding in a different, yet valuable, way:
- Avoiding Capital Gains Tax: One of the most significant benefits of donating stock to charity is that you can avoid paying capital gains tax on appreciated assets. If you were to sell the stock, you’d be liable for capital gains tax on the profit, but by donating the stock directly to a charity, you eliminate this tax obligation.
- Income Tax Deduction: When you donate stock to a qualified charity, you can generally claim an income tax deduction based on the stock’s fair market value at the time of the donation. The deduction can help lower your overall taxable income, potentially reducing your tax liability. The tax deduction is only available for assets donated out of a taxable investment account. Pre-tax assets do not apply.
- Enhanced Deduction Limits: The IRS allows you to deduct the full fair market value of the stock you donate, up to certain limits, typically 50% of your adjusted gross income (AGI) – though limitations apply in some cases. Any excess deduction can be carried forward for up to five additional years, increasing the potential tax benefits of your donation.
- Simplification of Tax Filing: When you donate appreciated stock, you don’t need to track and report capital gains or losses associated with that stock, so donating stock can ultimately simplify your tax filing. This can streamline your tax return and reduce complexity.
- Potential Estate Tax Benefits: If you plan to include charitable giving in your estate plan donating stock can also help reduce your potential estate tax liability. Charitable bequests in your will or trust can lessen the taxable value of your estate, allowing more of your wealth to benefit your chosen causes.
How to Donate Your Stock to Charity
If you’d like to take advantage of the benefits of donating stock to charity, follow these steps:
- Choose a Qualified Charity: Ensure that the charity you plan to donate to is a qualified tax-exempt organization. Most well-known charities, such as nonprofits, educational institutions, and religious organizations, will qualify.
- Contact the Charity: Get in touch with the organization and inquire about their stock donation process. They will provide you with the necessary information and instructions for transferring the shares.
- Transfer the Stock: Work with your advisor or financial institution to transfer the stock directly to the charity’s account. You will need to provide the charity’s account information and any other required documentation.
- Obtain Receipt and Records: Once the transfer is complete, make sure to obtain a receipt from the charitable organization for your records. This will serve as evidence of your donation for tax purposes.
- Claim the Deduction: When you file your taxes, use IRS Form 8283 to report the non-cash charitable contribution and claim one of the most significant benefits of donating stock to charity. Be sure to include the value of the donated stock, as well as the charity’s details and the date of the donation.
It’s crucial to keep detailed records of the stock donation, including the stock’s purchase price, date of acquisition, and fair market value at the time of donation. These records will be essential for accurately reporting your donation on your tax return.
Making a Philanthropic Impact and Reaping the Benefits of Donating Stock to Charity
Donating stock to charity offers a unique opportunity to make a significant philanthropic impact while reaping financial benefits for yourself, too. You can support the causes you care about, leverage the power of compound growth, and benefit from the many tax advantages that come with donating stock. In essence, donating stock is a win-win scenario that enables you to make a positive difference in the world while optimizing your financial situation. So, if you’re looking for a way to give back and potentially reduce your tax liability, consider the many benefits of donating stock to charity.
If you’re feeling inspired to donate stock this year but you’re unsure where to begin, Davidson Capital Management is here to help. Our team of experts can guide you through the process, ensuring you take the right steps to maximize your donations while also optimizing your financial strategy. Make your wealth work for the greater good and give us a call today.