Now that Tax Day has come and gone, you’re probably looking for more ways to reduce your tax burden. Have you considered donating stocks you own to charity? Here are some reasons why it’s worth considering.
Taking the Pain Out of Taxes
Were you breathing into a paper bag as you sent your tax payment to the Internal Revenue Service? You’re not alone. Like thousands of other taxpayers, you’re looking for ways to lower the amount you hand over to Uncle Sam.
One way, of course, is contributing to your IRA or 401k, but there are limits to the amount you can contribute every year. Another option is donating to charities and non-profit organizations. You can donate various items, from household goods to clothing, to automobiles, and, of course, cash.
If you’re short on liquid funds, you might be tempted to cash in some of your stocks to make your charitable contributions. But you—and your chosen non-profit—may be better off if you give your stock directly to the charitable organization.
Maximize Your Donation, Minimize Your Tax Obligation
Assuming it did well and appreciated, you will be subject to federal capital gains tax on your net proceeds when you sell your stock. The amount of your tax exposure will depend on your income bracket and how long you’ve held the assets.
Schwab Charitable illustrates how cashing in part or all of your shares and donating the proceeds to a non-profit will increase your tax bill and decrease the value of your charitable gift.
Alternatively, when you donate your shares directly to your chosen charity, the organization gets the full value of your stock contribution. Plus, you avoid capital gains and can deduct the entire fair-market value from your income taxes (up to the limit allowed by the IRS).
Future You Will Thank You Too
So now you see how donating your stock can lower your taxes now, but did you know it can also reduce your future capital gains tax obligation? Here’s how.
When you give a portion of your appreciated shares to a charity and then replace them with new shares at the current (and higher) price, your cost basis adjusts to the higher price. That adjustment reduces the amount subject to capital gains tax when you liquidate your shares later on.
Donating Stock is Easier Than You Think
If you have a charity or two in mind to donate your shares to, you should find out if the organization has a brokerage account that accepts donated stock. Many charities have this information on their websites but don’t be shy about picking up the phone or sending a message if you can’t find it.
You can also try a third-party service, such as Donate Stock can facilitate your donation. Bear in mind that the non-profit may be charged a processing fee.
Perhaps the easiest option is to transfer your stock into a donor-advised fund (DAF). This is especially useful if you don’t know which charity or charities you want to give to. You can move your stock into your fund and get the tax benefits the same year while donating from your fund to your chosen organizations over time.
Funding a DAF also simplifies your recordkeeping. You only need to keep the receipt from your DAF contribution rather than keeping one for every charity you support.
No Time Like the Present to Save on Taxes
Donating your stock is a great way to reduce your tax burden now and potentially lower your taxes in the future. Instead of waiting until the end of the year, when brokerages are usually their busiest, consider making your gift or setting up your donor-advised fund now.
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