5 Steps to Combine Your Tax Planning and Charitable Giving Goals
Are you passionate about sharing your financial resources with causes and organizations you care about? Do you find meaning in creating an impact in the world? If so, consider how you might donate stock to charity to accomplish both your charitable giving goals and smart tax planning, too.
Why Donate Stock?
When it comes to tax-savvy methods for donating to a 501(c)(3) organization, choosing to donate stock is high on the list – and it allows more of your dollars to benefit causes that are meaningful to you, too.
With this charitable giving strategy, your donation goes further than if you simply sold an appreciated stock and donated the profits. This is because gifting appreciated security rather than selling it for a profit lets you avoid paying capital gains tax on the appreciation. In addition, you can take a tax deduction on the current value of any donated shares. This is truly a win-win situation because you maximize your philanthropic impact while also enjoying significant tax advantages.
How it Works
While it may appear that choosing to donate stock means going through a complicated process, the truth is that it’s fairly straightforward. You start by completing a stock transfer form from the brokerage where your stock assets are managed. Here’s a step-by-step breakdown of how it works:
Step 1 – Choose Which Shares of Stock You Wish to Donate
There are several options available to you when you choose to donate stock, including publicly traded stocks, bonds, ETFs, and mutual funds. To maximize the tax benefit, consider donating stocks that have appreciated in value after you acquired them and that you have owned for more than 1 year. After you have selected the shares you’ll be gifting from your portfolio, you’ll need the following information:
- The name of the stock
- Its ticker symbol
- The number of shares you’d like to donate
These three pieces of information will be critical as you move forward with your stock donation.
Step 2 – Find the Non-Profit Organization’s Account Details
To donate stock to a registered charitable organization, you’ll need specific information before you can move forward. If there is a gift officer at the organization with whom you have an existing relationship, they can guide you. If you’re not in contact with an organization representative, you can often find general contact information on the charity’s website.
Here’s what you’ll need from the organization:
- Full legal name
- Employer Identification Number (EIN) issued by the IRS
- Name of the receiving institution (i.e. the organization’s brokerage firm)
- Brokerage account number
- DTC number
After you’ve secured this information, you can move forward to the next step in your transaction.
Step 3 – Submit Stock Donation Forms to Your Brokerage
Since your brokerage manages your stock assets, it is responsible for transferring your chosen stock shares to the charitable organization. It can be difficult to reach someone to speak to at the larger brokerages, but you can usually find the forms needed to donate stock in your brokerage’s online portal where you access your account information.
Most often, you’ll need to submit the brokerage forms by postal mail. You’ll likely be required to use black ink if you’re completing the forms by hand, and you’ll need to refer to the details you gathered in Steps 1 and 2 above. You’ll typically mail the forms to your brokerage, though some do offer an online e-signing option. Remember to retain your confirmation number for your records.
Note: To be eligible for a tax deduction in a particular year, you’ll need to complete the entire process to donate stock by December 31 of the tax year in question. This does NOT mean submitting the required forms or initiating a transfer request by that date. The stock gift must be fully received and recorded by the recipient organization by December 31. As a result, it is important to start the process earlier in the year to ensure that you have had the time needed to gather the required information and complete all the necessary steps.
Step 4 – Confirm Your Gift Was Received and Recorded
When you decide to donate stock, it’s smart to let the receiving organization know that a gift is forthcoming. Otherwise, there could be confusion upon transfer. After your stock donation transaction processes, you should receive an official receipt from the charity. Keep it for your records, as it specifies important details such as the date of transfer and the value of your stock donation. Keep in mind that the charitable contribution amount is the value of the stock on the date that the charity receives the stock donation. Market volatility could impact the charitable donation you are able to claim.
SEE ALSO: Planned Giving Goes Further
Step 5 – Report the Donation at Tax Time
You are required to report your stock donation details to the IRS when you file your taxes, and you’ll need to use Form 8283, which covers non-cash charitable gifts. File this form with your tax return for the tax year in which the stock gift was made. Typically, you will be eligible to receive a deduction for the full fair market value of the stock shares you donated, up to 30% of your adjusted gross income only if you claim the itemized deduction instead of the standard deduction on your tax return.
A Strategy for Maintaining Stock Ownership and Still Receiving Tax Advantages
If you’ve chosen to donate stock shares that you would still like to own, here’s a note on strategy: You can donate the shares and then write a check to your investment account to buy the same amount of shares you just gave away. The newly purchased shares will have a new cost basis and you can avoid paying capital gains taxes. This option works well if you’re close to retiring and in your peak earning years, especially if you itemize deductions.
Are You Interested in Learning More About How to Donate Stock?
Many people don’t realize it’s possible but choosing to donate long-term appreciated securities to charity is a savvy way to increase the impact of your philanthropy and benefit from potentially significant tax advantages, too. Charitable planning is an important part of overall tax planning and wealth management for WFA’s charitably inclined clients. If you’re interested in discussing how you can best achieve your charitable giving goals and whether donating stock may be right for you, schedule a conversation with us today. We look forward to discussing how you can make charitable giving an integral and meaningful component of your financial plans.