We have just wrapped up the busiest time of the year for charitable giving. Since January is when most people sit down to revisit their budget, this is an excellent time to review your charitable giving strategy.
Most people give to charity by writing a check. This is an easy way of supporting an organization – it only takes a moment to write a check and every charity will have a bank account into which they can deposit checks.
However, giving appreciated stock from a brokerage account to a charity is even more efficient in terms of tax savings. This method not only allows you to support your favorite charity, but you also avoid paying capital gains tax on your gift.
If you are in a higher tax bracket than the 15%, you must pay capital gains tax on any stock you sell that has appreciated since the time you purchased it. If you have been investing for a while, there is a good chance you have some highly appreciated stock which can make it difficult to rebalance your portfolio.
Giving that highly-appreciated stock allows you to shift them out of your portfolio without penalty and when a charity receives the stock, they can sell it at its current market value and use the cash. Charities do not have to pay capital gains on gifts they receive, so that tax is avoided altogether.
Not only can you take the gift off on your taxes as a charitable donation but it makes it much easier to rebalance your portfolio.
If you are still in the phase of life where you are saving for retirement, be sure to replenish your brokerage account after giving a gift of stock. You would still write a check (or make an online transfer) for the amount you are giving, but the cash will go to your account and the stock will go to the charity. Then you can buy whatever you need to rebalance your portfolio, even the exact same security you just donated, but without the tax-inducing capital gains.
Some charities list their stock liquidation or brokerage account information on their websites, and for others you may need to get in contact with someone at the charity to ask them for transfer information. It is always best to verify that their information is current before initiating a transfer.
You will need the following information from the charity when you are ready to make your donation:
- The name of the broker or custodian who can receive stocks or mutual funds
- The name or title of the account (also sometimes called the account registration)
- The account number
- The DTC number for stock transfers
- The contact person at the charity, and the contact person at the brokerage/ custodian
It is often helpful to let someone at the charity know what stock you are giving and how many shares, as well as the time frame in which to expect the transfer. From the charity’s perspective, they only see shares appear in their account, often without accompanying information to help them identify the donor. Every charity I’ve spoken to appreciates knowing who to thank for the gift.
Once you have all the account information from the charity, you can fill out a form or write a letter of instruction to your broker to make the transfer.
For tax purposes, you may want to note the cost basis of the gift before transferring it. Once your gift has left your account, the correct way to document the value of your gift on your taxes is to take the average of the highest and lowest value of the stock on the date of transfer. You can easily look up the ticker symbol on Google or Yahoo Finance’s historical price tab, find the highest and lowest price per share, find the average, and multiply by the number of shares donated.
Is giving appreciated stock more work than writing a check to charity? Yes. But the tax savings from the deduction and avoiding paying capital gains can make the paperwork worthwhile. And if you work with a financial advisor, they will likely help you through the process, making it that much easier.
To really simplify the process, consider opening a donor-advised fund and transferring stock there. The fund takes care of most of the paperwork, keeps records of your gifts, and cuts out the step of looking up the charity’s information because the fund will keep that on file for you.
Instead of just reaching for the checkbook this year, consider giving appreciated stock. Both you and your favorite causes will benefit.
Photo used under Flickr Creative Commons license.