Quirk #1: Difference between Shares and Cash
Donating appreciated shares is undoubtedly a smart tax move. However, it's important to understand that shares function differently than cash. For instance, consider a scenario where you decide to donate $10,000 to a charity. If you write them a check for the exact amount, they will indeed receive $10,000, but your net worth will decrease by the same amount. Furthermore, your tax deduction will also be based on this $10,000.
However, when it comes to donating shares, things get a bit more complex due to fluctuating stock values. While you can calculate the number of shares required to make a $10,000 donation, the charity may not receive shares worth exactly $10,000. The value of stocks can change rapidly. Nevertheless, if executed correctly, the charity will receive approximately $10,000, your net worth will decrease by a similar amount, and your tax deduction will be based on the fair market value of approximately $10,000.
The Transfer Process and Potential Price Changes
During the transfer process, there is a possibility that the stock price may rise or decline. If the price rises, the charity can sell the received stock and potentially receive more than the intended $10,000. Most individuals are satisfied with this outcome. However, if the stock price declines, the charity might not receive the full $10,000 you initially intended them to have. In such cases, donors usually write an additional check covering the difference or donate extra shares to fulfill their pledge.
How Charities Handle Stock Donations
To safeguard against significant fluctuations that may impede their fundraising goals, most charities have policies in place to sell donated shares as soon as possible after receiving them. However, it is important to note that your tax deduction is based on the fair market value at the time of the donation and not on what the charity eventually receives when they sell the shares.
By demystifying these intricacies, I hope to have provided you with a better understanding of how donating appreciated shares works. It's an impactful way to contribute to causes you care about while also potentially enjoying tax benefits.
Read: Social Security taxes: There’s practically no escape from the 85% rate
Donating Shares to Charities: A Smart Tax Move
Many large, well-known charities receive shares as donations, but smaller or newer charities may have never been fortunate enough to receive stocks as gifts. If you're considering donating shares, it's crucial to contact the charity first to ensure that it is a 501(c)(3) charity with an established brokerage account. Although there are some veterans organizations and volunteer firefighter groups that qualify as 501(c)(4)s, most of the charities we donate to will fall under the category of 501(c)(3), which is necessary for the donation to be tax-deductible. To confirm a charity's tax status, you can verify it here.
For a charity to accept publicly traded securities, it must have a brokerage account in place. Setting up such an account for a charity is a more involved process than setting up an individual account. While it may not be excessively difficult, it can take time, particularly if multiple people need to sign paperwork and if the brokerage firm requires certain documentation. Keep in mind that starting this process in late December is not advisable due to potential delays.
Before taking action, it's essential to consult with your adviser. Deduction limits apply, and the limit for donating appreciated shares is often lower than for cash donations. Additionally, some donations may have Alternative Minimum Tax implications. Despite these intricacies, donating shares can be an excellent tax strategy, especially if you own appreciated shares.
If you have any questions for Dan, please feel free to email him with "Q&A" in the subject line.
Note: Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo, serving clients nationwide from offices in Orlando, Melbourne, and Tampa, Florida. The comments provided above are for informational purposes only and should not be considered a substitute for personalized advice. We recommend consulting your adviser to determine what options are best for you. Some reader questions have been edited to enhance the clarity of the subject matter.
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