Should I donate appreciated stock or cash?

Should You Donate Appreciated Stock💡 Definition:Stocks are shares in a company, offering potential growth and dividends to investors. or Cash?

When it comes to charitable giving, the decision between donating appreciated stock or cash is more than just a matter of convenience. It can have significant tax implications that could enhance the impact of your donation. Although many donors default💡 Definition:Default is failing to meet loan obligations, impacting credit and future borrowing options. to cash, donating appreciated securities can often be the more tax-efficient choice. Let's delve into the benefits and considerations of each option to help you make an informed decision.

The Tax Advantage of Donating Appreciated Stock

Donating appreciated stock provides a dual tax benefit that cash donations do not. When you donate long-term appreciated securities—those held for more than a year—directly to a qualified charity, you are entitled to a tax deduction💡 Definition:A tax deduction reduces your taxable income, lowering your tax bill and increasing your potential refund. based on the stock's fair 💡 Definition:Fair value is an asset's true worth in the market, crucial for informed investment decisions.market value💡 Definition:The total value of a company's outstanding shares, calculated by multiplying share price by the number of shares.. More importantly, you also avoid paying 💡 Definition:Tax on profits from selling investments like stocks, bonds, or real estate.capital gains💡 Definition:Profits realized from selling investments like stocks, bonds, or real estate for more than their cost basis. tax on the appreciation💡 Definition:The increase in an asset's value over time, whether it's real estate, stocks, or other investments..

Quantifying the Tax Benefits

Consider a scenario where a couple in the highest 💡 Definition:The tax rate applied to your last dollar of income—the rate you pay on additional earnings.tax bracket💡 Definition:The range of income taxed at a specific rate under the U.S. progressive tax system. wants to make a $100,000 charitable donation:

• Cash Donation: The couple would receive approximately $37,000 in tax savings💡 Definition:Frugality is the practice of mindful spending to save money and achieve financial goals..
• Appreciated Stock Donation (with a $50,000 basis): They could achieve approximately $48,900 in tax savings—an additional $11,900 compared to a cash donation.

This example illustrates how stock donations can increase your tax savings, allowing you to contribute more effectively to your chosen cause.

Maximize Your Giving with Strategic Approaches

Here are some strategies to maximize the benefits of donating appreciated stock:

• Donate High-Performing Stocks: Opt for stocks with the highest appreciation relative to their original purchase price. After donating, consider repurchasing the same security💡 Definition:Collateral is an asset pledged as security for a loan, reducing lender risk and enabling easier borrowing. to reset your cost basis, potentially benefiting from future tax-loss harvesting💡 Definition:Selling investments at a loss to offset capital gains or up to $3,000 of ordinary income each year..

• Use Donor-Advised Funds (DAFs): These funds enable you to receive an immediate tax deduction of up to 30% of your adjusted 💡 Definition:Your total income before any taxes or deductions are taken out—the starting point for tax calculations.gross income💡 Definition:Gross profit is revenue minus the cost of goods sold, reflecting a company's profitability on sales. for appreciated securities. You can maintain advisory control over how funds are distributed to charities.

• Align with Life Events: If possible, donate appreciated assets💡 Definition:Wealth is the accumulation of valuable resources, crucial for financial security and growth. during high-income years—such as after selling a business or receiving a large payout. This timing can maximize deductions against your substantial income.

Real-World Scenarios

Imagine you have $50,000 in stock with a $30,000 cost basis. Donating this stock directly to a charity instead of selling it first can save you $5,626 in federal taxes. This includes $1,666 in avoided capital gains tax and $3,960 from the charitable deduction💡 Definition:Tax deduction for donations to qualified organizations. These savings allow you to donate more than 20% additional funds to causes you care about.

Important Considerations and Common Mistakes

Before donating appreciated stock, ensure you meet these conditions:

• Holding Period: Securities must be held for over a year to qualify for long-term capital gains treatment.
• Qualified Charities: Ensure your donation goes to a qualified charitable organization. If your chosen charity can't accept securities directly, a Donor-Advised Fund might be a suitable alternative.
• AGI💡 Definition:Your total gross income minus specific deductions, used to determine tax liability and eligibility for credits. Limitations: Deductions for appreciated capital gain property💡 Definition:An asset is anything of value owned by an individual or entity, crucial for building wealth and financial security. are typically limited to 30% of your AGI for most charities. However, unused deductions can be carried forward for up to five years.

When Cash Donations Make More Sense

If your securities are worth less than their purchase price, it's often better to sell them and donate the cash. This way, you can claim a charitable deduction while using the capital losses💡 Definition:A loss realized when you sell an investment for less than you paid for it, which can offset capital gains for tax purposes. to offset other gains or up to $3,000 of ordinary income, thanks to tax-loss harvesting.

Bottom Line

For those holding appreciated securities and itemizing deductions💡 Definition:List of specific deductions (mortgage interest, charity, medical, taxes) that can exceed standard deduction and lower taxable income., donating stock directly to charity is generally more tax-efficient than cash donations. This approach allows you to maximize your tax savings and increase your contribution's impact. However, personal circumstances vary, so consulting with a tax and investment advisor💡 Definition:A financial advisor helps you manage investments and plan for financial goals, enhancing your financial well-being. is crucial to determine the best strategy for your situation. By making informed decisions, you can ensure that your charitable giving is both meaningful and financially savvy.