Giving to charity is a priority for many people, donations can be a cash donation or giving some material goods to your local non profit. Another way to donate that you should consider is to give your favorite charity the gift of stock. Donating stock is both a gift to the charity that could last for years, and it is a greater tax deduction for you. It has the potential to do greater good than a cash donation of equal value.
How it works
When you contribute to a registered charity you are allowed to claim that donation as a tax deduction. If you plan to make stock part of your donation there are a couple of ways that you can go about it. Here is an example, you have stock that you bought several years ago and it has increased in value. You can sell the stock and then donate the proceeds. There would still be capital gains liabilities and deductions for the charitable donation, all dependent on your income level.
The second option is to donate the stock directly to the charity. You would not have to worry about capital gains and you simply transfer ownership of the stock to the charity. The charity then has the option of selling the stock or hanging onto it. Neither you nor the charity would be forced to pay taxes on the value of the stock as it appreciates. You would still get the tax deduction of the full value of the stock on the day the donation is made.
Other things to consider
There are a couple of rules if you want to donate stock to your favorite charity, and receive the best tax benefit from it.
- You need to have had the stock at least one year to qualify for capital gains
- No matter the value of the stock you can only donate 30% of your gross income but you can forward unused deductions for the next five years. You can deduct the just the cost and this would allow you to raise the deductible limit to 50% of your adjusted gross income.
- The total amount you are allowed to deduct can change if your income becomes too high
Before you decide to donate some of your stock to your favorite charity talk to your accountant so that you can make the most of the tax deductions involved. Your accountant can help you make donations that work for you, the charity you want to contribute to as well as your financial goals.