4 Tax Benefits of Donating Stock to Charity & How to Do It Right

Have you ever considered donating stock to charity?

Donating to a charitable cause can be quite fulfilling. Americans love to contribute to causes they hold dear. In 2023 alone, individuals in the U.S. donated over $374 billion to charity.

Over 67% of Americans have donated money to philanthropy during their lives. The likelihood of giving increases with age — 73% of adults between 45 and 64 have donated to charity, and that figure rises to 85% for older citizens.

The most common ways of donating to charity include cash or checks. However, many donors don’t know that donating stock is one of the most strategic ways to support their favorite nonprofit.

In fact, only about 18% of charitable investors donated stock to charity in 2021.

With that in mind, here’s a detailed breakdown of the tax benefits of donating highly appreciated stock to charity and how to do it.

The Tax Benefits of Donating Stock to Charity

Donating stock to charity offers a variety of advantages, including:

1. Maximizing the Value of Donations

Donating securities instead of cash can boost the value of donations. This translates to more money going toward a donor’s favorite charitable causes. When an individual donates appreciated stock to a qualifying charity, they avoid paying capital gains tax. The highest bracket of the federal capital gains tax rate is 20%. As such, the value of stock donations to charity increases by the same amount.

2. Tax Savings

Donors can receive significant tax savings by donating stock to charities. This occurs in two ways:

The first is through charitable deductions. Individuals who gift to qualifying charities can deduct the fair market value of that donation from their adjusted gross income (AGI). However, the deduction must be in line with the IRS rules for donating stock to charity.

Second, donating appreciated stock to charity also helps investors reduce potential future capital gains. High-performing stocks can yield significant gains in the future. Individuals can reset their cost basis by donating some of their appreciated securities. Afterward, they can replace them with new shares acquired at a higher cost (the current price). This will mitigate capital gains tax exposure if the value of the stock continues to rise.

3. Portfolio Rebalancing

Are you dealing with a portfolio that has drifted from its target allocation?
Donating appreciated stock to charity could be the perfect solution.

Rebalancing can help individuals optimize their portfolio for risk and boost performance. Donating high-performing, long-term stocks with a low-cost basis can help rebalance a portfolio. It also shields donors from unnecessary tax exposure.

4. Effortless Donations

Fear of a complicated process may deter some individuals from donating securities. However, gifting stock to charities doesn’t have to be difficult. Donor-advised funds take all the work out of donating securities to non-profits. Individuals can make a single lump-sum donation to a charitable investment account. This allows investors to benefit from a deduction for the current tax year. Afterward, donors can choose the causes they want to support using the funded account.

How to Donate Stock to Charity

There are different ways of donating stock to charity. Individuals can choose between the traditional method or the simplified donor-advised fund route. Here’s a step-by-step breakdown of both processes.

Traditional (or Manual) Method

1. Security Selection: Only choose high-performing stocks when donating.

2. Confirm the Charity Accepts Stock Donations: Donors can find this information on a charity’s website or contact them directly to ask.

3. Get the Organization’s Account Information: Important details include:

Full name
Employer Identification Number (EIN)
Name of the nonprofit’s brokerage firm
The charity’s account number with the broker
The Deposit Trust Number (DTC) of the charity

4. Initiate the Transfer of Securities: Contact your broker and request that they transfer stock to the charity.

5. Follow Up with the Charity: This involves finding out whether the charity received the donation. Charities should also send you a receipt of the transaction. It will show the ticker symbol of the stock, the number of shares, and the total value received.

6. Complete the Necessary IRS Forms: After donating stock, investors must fill out specific IRS forms when filing their income taxes.

Using Donor-advised Funds

Donating appreciated stock to a donor-advised fund is a simple two-step process:

1. Select all the stock to be donated. The donor should state the number, type, and value of shares they intend to give away on their contribution agreement.

2. Transfer the securities. This will finalize the process.

And (optionally)…

3. Celebrate!

Limitations on Donating Stock to Charity

Charitable investors should understand the limitations of donating stock to charity. These limits are set by tax laws, which tend to change over time. Deduction limits vary depending on the type of charity (public or private) receiving the donation.

For public nonprofits and donor-advised funds, the donation of appreciated stock AGI limit is 30%. On the other hand, the deduction for donating appreciated stock to a private foundation is capped at 20% of the donor’s AGI. Excess contributions can be carried forward on a donor’s tax return for a period of up to five years.

Tips on Donating Stock to Charity

You can maximize the tax benefit and value of your stock donations to charity by following these tips:

Only donate liquid stock: Unlike illiquid, locked, or private stock, liquid securities are sold on public exchanges. As such, charities can sell off the stock with minimal hassle to fund their operations.

Don’t donate securities trading at a loss: Investors should sell such stock to harvest the loss for taxes. Afterward, the cash from the sale proceeds could be donated.

Avoid donating short-term stock: Deductions for this type of stock are limited to whichever is less between what you paid for it and its market value.

Make donations earlier in the year: This way, the donation will be eligible for a charitable deduction in the current tax year.

Make a single donation: This ensures that the charitable deductions exceed the standard deduction for the year. It creates the biggest impact on the donor’s tax bill.

Donate Wisely

Before donating securities, charitable investors should find out whether the charity accepts such donations. It’s also prudent to talk to your broker for more information.

Donating stock benefits both the donor and the receiving organization. Donors can enjoy significant tax deductions, and recipients may get a higher donation.

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