Q: I’ve read that gifting shares of stock to a charity is better than writing a check. Why is that and how does that get done?
— Paul in St. Louis
A.: Paul, yes, donating shares of stocks, mutual funds, ETFs and other securities can be better than cutting a check. It is something to consider if you own the shares in a taxable account, not an IRA, 401(k), or other retirement account and the shares have appreciated since you acquired it such that you would have a long-term capital gain upon selling the shares.
Say you want to make a $30,000 contribution to a capital fund at your alma mater. You can choose to write a check or donate $30,000 worth of shares of XYZ which you bought years ago for $10,000. Your potential charitable deduction is $30,000 whether you write the check or donate the shares. When your alma mater sells the shares, they would have $30,000 cash available just as it would if it had cashed a check.
From your perspective, you have made a $30,000 donation and your net worth has dropped by $30,000 with either method of donation. From the school’s perspective, they have $30,000 cash either way. The difference that makes donating the security a better choice is that you gave away a potential tax bill. Because a qualified charity doesn’t pay taxes on the gain from the sale of the security, the $20,000 gain in this example is never taxed.
The donation of shares is old hat for brokerage firms and established charities. It just takes a little paperwork to accomplish. That said, donating shares isn’t quite as tidy as my example suggests.
First, securities fluctuate in value, so the shares may be worth more or less on the day of the donation than you intend, and the shares may be worth more or less when the charity actually sells. Due to technology, most donations and subsequent sales happen quickly so the differences caused by changes in value are usually not large, but there will be differences.
The amount of your charitable deduction of a publicly held security is not affected by the amount the charity gets upon sale. Nonetheless, most charities have a policy of selling shares as soon as practical after receipt to mitigate the risk that the shares decline in value.
Another bit of untidiness exists because there are limits to charitable deductions. If you use the standard deduction, some or all your donation, regardless of form, may not result in an additional deduction. If you itemize deductions, in a given tax year, cash donations are limited to 60% of your Adjusted Gross Income (AGI) whereas donating appreciated shares is limited to 30% of AGI. If you hit those limits, the excess is “carried forward” for use on Schedule A in future tax years until used up or five years pass, whichever comes first.
Don’t let these details dampen your enthusiasm for giving. Instead, discuss how to navigate these quirks with your adviser so you can donate more to the causes that are important to you.
If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line.
Dan Moisand’s comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.
Source : MTV
