Donating Stock to Charities Can Yield Bigger Tax Savings

Scrolling through your inbox, you come across an e-mail from your favorite charity asking for a donation. You’ve been meaning to make a contribution for a while now, but just never got around to sending them a payment.

But you’re ready to do it now, and you’re cyber smart, so you avoid the e-mail and go directly to the charity’s web site.

Regardless of how you make your payment – credit card, debit card, EFT, or mailing a physical check – your donation is considered a cash contribution.

Instead of making a cash contribution to a charity, you could instead make a stock contribution and see a potentially larger tax deduction.

To illustrate, assume you purchased stock in 2015 for $10,000 and donated the stock in 2020 when the fair market value was $15,000. Here are three different scenarios and their tax implications assuming your marginal income tax rate is 37% and your long-term capital gain rate is 20%.

1. Donate cash instead of selling stock. Donating $15,000 of straight-up cash to the charity decreases your taxes by $5,550 if you itemize deductions. You get a charitable contribution tax deduction equal to the fair market value of the stock when it is donated, which in this example is $15,000. Your income tax savings is 37% of $15,000, or $5,550.

2. Sell stock and donate the proceeds. Selling the stock and then donating the cash proceeds reduces your tax liability by $4,550. Here’s why:

  • Income tax savings = $5,550 (37% of $15,000)
  • Capital gains taxes paid = $1,000. Selling the stock first means that you have to pay taxes on the gain. Your tax liability is 20% of $5,000.

3. Donate the stock directly to the charity. Donating your stock directly to the charity cuts your tax bill by $6,550! Here’s how it works:

  • Income tax savings = $5,550 (37% of $15,000)
  • Capital gains tax savings = $1,000. By donating the stock, you do not owe long-term capital gain taxes. This saves 20% of the $5,000.

As you can see, directly donating stock to a charity can potentially save you $6,550 in taxes, compared to $5,550 if donating straight-up cash and $4,550 if selling the stock then donating the proceeds.

Donating stock directly to a charity is slightly more complicated than donating cash and requires you do it correctly. If you’re considering making a donation of stock to a charity, please call.

As always, should you have any questions or concerns regarding your tax situation please feel free to call.