I'm trying to decide between donating stock or cash to a nonprofit. As I start to plan for next year's taxes, I'm wondering about my tax liability as well as theirs. Can you help?
This is not only a great question, but it also comes at an opportune time. All too often we find ourselves scrambling at the last minute to get our tax returns ready, without having taken time to strategize. But with some advance planning, you can make an informed decision—not only for yourself, but also for the fortunate charity that you'll be supporting. Let's take a look at your options and the implications for both you and the charity.
A potential win-win
Donating stock (as opposed to cash) to a nonprofit can be a way to increase the value of your gift, potentially benefiting both you and the charity. The potential tax benefit comes in two parts: avoiding capital gains and maximizing your charitable deduction—provided that you meet certain conditions.
First, the stock must have appreciated in value since you purchased it. Anytime you sell appreciated stock, you'll owe capital gains tax. But by gifting the stock to a qualified charity, you might be able to avoid paying capital gains tax, thereby increasing the value of your gift. Note, however, that the opposite is true if the stock has lost value. In this case, it's likely that you'd be better off selling the stock and realizing the capital loss. You could then donate the proceeds.
Second, to get the maximum deduction you must have owned the stock for more than one year. Stock owned for more than one year is considered a long-term asset, which generally allows you to deduct the entire fair market value of the donation from your taxes. However, under current tax laws if you held the stock for one year or less, it's considered a short-term holding and you would only be able to deduct the purchase price, not the appreciated fair market value.
Keep in mind that the tax deduction is relevant only if you itemize on your return. In 2023, the standard deduction is $13,850 for single filers and $27,700 for joint filers. If the sum of your deductions falls below this threshold, the charitable contribution won't help reduce your tax bill. Also realize that the deduction is limited to 30% of your adjusted gross income. That said, if you can't use the entire deduction in one year, you can carry over the unused portions for five years.
One final consideration is that the nonprofit you choose to support must be one that the IRS considers a 'qualified' charity. Political organizations, lobbying groups, or certain private foundations will likely not be eligible.
Considerations for the nonprofit
You're being very thoughtful to consider the tax impact of a gift of stock for the nonprofit, but more than likely this isn't an issue. By and large, charities aren't interested in managing a stock portfolio or even keeping a single holding. The nonprofit will much more than likely sell the stock immediately, converting the gift into cash without having to deal with a tax liability.
This does, however, bring up another point. From the charity's perspective, it's essential that the stock be highly liquid. Because they're likely to want to sell the stock immediately for its full market value, the stock should be one that it can easily sell on a major public exchange. Because of this, privately held stocks or restricted shares of public stocks aren't a good choice from the charity's perspective.
The benefits of a donor-advised fund
Another powerful and perhaps less well-known way to maximize your charitable contribution is a charitable gift account (also known as a donor-advised fund), offered by many financial institutions.
Instead of giving the stock directly to the nonprofit, you could instead use your appreciated stock to open a charitable account. You'll get all of the tax benefits of donating directly to a charity (avoiding capital gains tax plus a charitable deduction) without the obligation to dole out your funds at one time, or to only one charity. In addition, your contribution can be invested for potential growth before it's given to charities, and the fund will take care of the bulk of your recordkeeping and maintain a complete history of your giving.
A donor-advised fund can be an good choice if you generally take the standard deduction. With a donor-advised fund, you can instead aggregate multiple years of contributions (and deductions) into one year—so you can exceed the standard deduction amount and itemize your deductions that year—but still dole out your donations over time.
Talk to your financial and tax advisors
My final thought is that this may well be a time when you could benefit from the personal advice of your advisors, especially if the stock represents a good chunk of your portfolio. Selling just one position may impact your overall asset allocation, so you'll need to think about rebalancing to avoid changing your balance of risk and potential for return. Plus, whenever taxes come into play, it can be smart to double check your decisions with a trained professional.
Regardless of your decision, I applaud your generosity. To a very large extent our country relies on individuals like you to support nonprofits that enrich our culture and provide essential social services. Thank you for doing your part to improve all of our lives.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.0523-3VAB