This year, you may want to give back during the holiday season. While you can always donate money to charities year-round, this holiday season you might try donating your stocks instead.
By doing your research on donating your stocks to a charity, you can potentially reduce your bill come tax time.
The benefits of donating stocks
If you want to give generously to a charity but don’t have the funds to do so in your bank account, donating stocks is a great option for you. For many of us, the value of stocks you own is higher than the amount of cash you can comfortably afford to donate, Because of this, donating stock to charity allows you to contribute to your favorite cause without breaking the bank — and feel great about giving back at the same time!
In addition, when donating appreciated stock to a 501(c)(3) organization, you can avoid having to pay the capital gains tax on your tax return. This would apply if your stocks have gone up in value from the time you purchased them.
Donating stock would be much better option than selling your stock and then donating the money from it because you’d get hit with a capital gains tax of 20 percent if your stock has appreciated for longer than 12 months.
The tax deduction you can make from donating stock to charity is going to be for the full fair market value of the stock, up to the amount the IRS allows.
If you have stocks that you want to hold for several years but also want to donate stocks to charity to avoid the capital gains tax, there is a solution: donating shares of stock to a charity instead. In this scenario, you could donate some of your shares that have appreciated and buy new shares to reduce your capital gains tax in the future.
What about donating depreciated stock to charity?
Let’s say you have stocks, but they’ve gone down in value since you first purchased them. In this case, it’s best to sell your stocks, and then take the money and donate it to charity.
How to donate stock
Once you’ve found a charitable 501(c)(3) organization you want to support, it’s important to contact them to find out if they will accept your stocks as a donation. Keep in mind that you cannot deduct contributions made to political organizations or candidates, or to specific individuals.
The charity may have a brokerage account, and they will give you information on how to make the transfer. Tell your brokerage firm that you’re going to do a transfer in kind to a charitable organization. The charity can then sell the stock and use the gains to cover their expenses without having to pay any taxes.
When you donate, make sure you get a receipt from the organization that says the name of the charity, your name, a description of the stocks (or cash) donated, the date of the donation, the amount, a statement on whether or not goods or services were offered in exchange for the donation, and a statement regarding the value of the goods or services the charity provides to the donor, as well as a statement saying that the tax deduction might be limited.
The bottom line
When you’re considering charitable giving over the holidays, consider donating stock to a nonprofit instead of donating cash. This could be a beneficial situation for you and the charity and lower both of your tax bills for 2021.