IRS tax regulations allow you to donate stocks and mutual funds to non-profit organizations. Understanding a few tax implications regarding your contribution will help add value to your donation. However, many people think that donating the stock and selling the stock to give the money to a charity yields the exact same results. However, by donating the stocks with a capital gain, both the donor and the recipient will benefit more if the stocks are donated instead of selling them and donating the cash.
A Brief Introduction to Capital Gains:
When you sell a stock or mutual fund for more than you paid for it, the IRS will require you to pay taxes on those gains. For example, if you purchase something for $100 and it grows to be worth $110, when you take out the $110 you will be required to pay capital gains taxes on $10.
You will need to learn about mutual fund capital gains in order to fully understand the benefits of donating stocks instead of cash.
Why Donate A Stock or Mutual Fund With A Gain To Charity?
When you donate a stock to a charity, you give them the actual stocks.
Thus, using the illustration above, you would give the charity $110 worth of stock. The IRS would allow you to claim a charitable donation for $110. The charity can then sell the stock for $110 and they end up with $110.
Disadvantages of Selling a Stock or Mutual Fund and Donating the Money to a Charity
However, if you sell your stock, you will pay a capital gains tax. If you sell your $110 worth of stocks, then you would need to pay 30% in taxes (purely for illustrative purposes – visit this to find out your exact capital gains tax rates) on your $10 capital gain. Once you pay $3 in capital gains you now only have $107 to donate to the charity. Perhaps you still want to donate $110 so you would need to actually donate $113 of your own money in order for the charity to get $110.
Should I Donate a Stock or Mutual Fund With a Loss to a Charity?
In this case, you would be better off selling the mutual fund so that you could claim the capital loss. The charity would still receive the exact same amount.
Let’s say your stock is now worth $90 when you paid $100. If you give to the charity, they get $90 worth of stock. If you sell the stock and give the money to charity, you get a $10 capital gains loss and the charity still gets $90.
Special Considerations for Small Charities
Some churches and charities are not able/willing (due to the administrative work) to accept stock or mutual fund donations. In these cases, if you support the organization, it is advisable that you sell your stock and give cash to these organizations.
Before you do this, it would be worth your effort to contact the organization and let them know what you would like to do. If they can make the necessary arrangements, it could provide you with a significant tax savings. At the end of the day, do what is right and best, not just what gives you the best tax advantage. However, if something can benefit both you and the charity, then by all means, take advantage of the tax savings.
Photo by Helico.
If you are considering donating stocks or mutual funds, it is advised that you seek out the advice of a qualified tax professional.
{ 3 comments… read them below or add one }
Another option for small charities is to put your stocks in a donor advised fund (DAF) and then send them the cash from that. You still get the deduction and they still get the cash. There are minimums for opening a DAF though so that’s one drawback.
I would echo Paul’s sentiments from above. We use Donor Advised Funds for most of our clients as a powerful tool for charitable giving. The National Christian Foundation (http://www.nationalchristian.com) is a large organization that serves Christians throughout the country. They can receive gifts of stock/mutual funds as well as very complex gifts. You can then direct where you would like the cash to go once the asset has been sold. DAFs are also offered through institutions with no connection to a denomination or Christian world view.
@Craig. Your readers would be well served to be exposed to a tool such as a DAF. Also, thank you for your contributions to this blog!
It’s a very subtle, yet very important difference. Thanks for pointing it out. I have a close friend who actually sold stocks to give money to his favorite charity after the Haiti earthquake. Had I known about this, I would probably have suggested he donate the actual stocks. He’s planning on donating again, so I’ll make sure he reads about this