When Stock Makes a Better Charitable Gift Than Cash

n9yfjkdc0va-jean-lakosnykMinnesotans are a generous bunch. A recent survey by WalletHub ranked Minnesota as the third most charitable state in the nation. We jump to #2 when you throw volunteering and service time into the mix.

While gifts of cash are always welcome (and usually tax deductible) at most non-profits, if you are looking to juice up your giving this year and get the biggest after-tax bang for your charitable buck, consider the gift of stock or a mutual fund instead.  

Here’s why:

Donate highly appreciated stocks or mutual funds. Nearly every major charity, church or non-profit is able to accept stock or even mutual funds as a financial gift in lieu of cash. (To keep things simple, I will use the terms stock or mutual funds interchangeably).

Gifts of appreciated stock have the extra benefit of avoiding capital gains tax in addition to taking an income tax deduction in the amount of your gift. The more your stock has appreciated, the more taxes you save.

Here’s how it works:

To make a cash gift of $10,000 is simple enough. Write a check out to a qualified 501(c)3 non-profit organization by December 31, and save the receipt with your tax records. For a list of Minnesota charities that meet the high standards of the Charities Review Council, click here.

If you are in the 25% Federal income tax bracket, you save $2,500 in tax.

However, if you donate $10,000 of appreciated stock you can save even more.

For example, a stock valued at $10,000 today would have a taxable capital gain of $6,000 if the stock was originally purchased for $4,000. Taxpayers in the 25% bracket would pay a capital gains tax of 15% – an additional tax of $900 in this case – when they sell this stock.

By donating appreciated stock you still get the benefit of a year-end tax deduction but you also get the additional benefit of avoiding capital gains tax on the stock. The two gifts (cash vs. stock) are of equal value, but the gift of stock avoids the capital gains tax as well.

The more your stock has increased in value the more tax dollars you save.

Great strategy, but is it for me? Well, that depends. Consider these situations before making your gift:

  • If you take the standard deduction on your tax return, neither strategy will give you a tax benefit. Tax strategies like this only work when you itemize your deductions and the total of your itemized deductions exceeds your standard deduction ($6,300 for single filers; $12,600 for married couples filing jointly).
  • If your income falls into the 10% or 15% Federal income tax bracket, gifts of cash or appreciated stock will give you the same tax benefit. There is no extra tax benefit to gift stock versus cash. That’s because taxpayers who fall into the lowest brackets don’t pay capital gains taxes. If you are unsure of your tax bracket, click here.
  • Your stock has capital losses rather than capital gains. The key here is capital gains. If your stock is worth less than you paid for it, you are better off selling the stock so you can write off those losses against other gains or personal income. Gifting of stock only provides an additional tax benefit if the stock has gone up significantly in value.
  • You are in the 25% tax bracket or higher. This strategy of gifting highly appreciated stock or mutual funds is for you! You are in the sweet spot where this strategy works best. Married couples with a taxable income of $75,301 or more ($37,651 or more for single filers) will benefit from gifting appreciated stock rather than an outright gift of cash.

If you are considering a making a year-end, tax-deductible gift to your favorite charity, be smart about it. Talk to your tax professional or financial advisor about the best strategy for you.

The 2016 tax year will be over before you know it.