Best Practices: Maximizing Your Charitable Giving
Many of us have a natural inclination to help and serve our communities, and this is often performed in many different ways, including through charitable contributions. For those familiar with philanthropic giving, it’s no secret that making charitable contributions, either cash or non-cash, can improve your tax situation, sometimes significantly. But what you may not know, is that the way you donate it can also make an impact.
Let’s say you want to make a $10,000 donation to a charitable organization, and you want to pay for it with some stock that you own. Your plan is likely to sell some shares and use the cash for the donation, right?
Not so fast! Did you know you can actually donate the shares directly and record the fair market value as the donation?
What’s the difference?
If you sell the stock, you have to:
- report the sale and gain on your tax return
- pay the federal income taxes
- then contribute the only the net proceeds
If you skip the stock sale and give your stock investment directly to the charitable organization, you do not need to recognize the gain (or pay tax on it) but you do get the benefit of the charitable donation equal to the market value of the stock at the time of the donation. Your income tax benefit from the charitable contribution is maximized when your tax basis (i.e. purchase price) for the stock is low since you do not have to recognize the gain between fair market value and the tax basis.
What about the organization?
The charitable organization you donate the stock to has two additional benefits, as well. They can keep the stock if they so choose, and benefit even further if the stock price increases. And, as a non-profit, if they sell the stock, they do not have to recognize the gain since they are exempt from federal income tax.
So, as you make plans for your philanthropic giving – before you cash out that stock for your charitable donations, consider donating it as is. It could be a win-win for you and the charity of your choice.
Not sure what is best in your specific situation? Let’s chat.