Last year I did something I thought only millionaires did.  No, it wasn’t swimming in a pool filled with gold doubloons… which actually sounds pretty painful if you ask me.  I donated shares of stock to a charity.  A few years ago I bought shares of BIDU when it was at around $128 a share.  A 10-for-1 stock split and a climb to $138 later (cha-ching!) and I had the mixed blessings of capital gains.  If I were to sell the stock (after holding onto it for over a year) over 90% of the sale would have been taxed at 15%.

If you know me, you know that I absolutely hate giving any money to Uncle Sam… because he spends it on so many needless and expensive things.  So to keep that money away from him and into more worthy hands, I decided to donate the stock to a non-profit charity.  Not only did the charity benefit but I was able to give more because if I had sold the stock and donated the resultant cash, it would be minus the 15% in taxes.  

But here’s the best part.  I could deduct the full value of the stock at the time of donation from my personal income as long as I held the stock longer than a year (if less than a year, you can only deduct the original cost at which you bought the stock).  This means that you also get the benefit of reducing your tax burden by the value of the stock you donated.  For me this felt like donating money I never had (since it was 90% gains) AND deducting the money out of my income for tax purposes.  All in all, in that one transaction, I would say that I saved approximately 40% of the value of the stock in taxes alone (in not having to pay capital gains and being able to deduct the value of the donation from my income).

A little confusing?  Allow me to illustrate:

Let’s say you bought $1k of stock 2 years ago.  Let’s also say it increased to $10k (uh… your actual results may vary).

If you were to sell it, you would have to pay long-term capital gains on the $9k that it increased (currently 15%).  In other words $9k x 0.15 = $1350

Now, let’s say your marginal income tax rate is about 28%… add to that about 5% state tax rate (for a total of 33%)… by donating $10k to charity, you save about $3300 in taxes.

Therefore, $1350 saved from not having to pay capital gains and $3300 saved from your generous donation… and voila.  You just increased your refund by $4650 by donating $10k worth of stock… (off an original $1k investment, mind you).  Not bad at all.

If this is something that you’re considering doing, to maximize the benefit of doing it there are some things to keep in mind.

Make sure the charity has a way of accepting stock

The charity I chose actually was not set up to do this.  I had to wait until they set up a brokerage account to accept the shares.  This is especially important if you want to be able to take the tax deduction in a certain year.  Do not simply sell the shares and donate the cash.  You will have to pay capital gains tax (if you have gains) by doing this.  Also make sure they give you some sort of receipt that this transaction took place.

It’s best if you have gains

While not required, if you want to take advantage of not having to pay taxes on your donation, make sure you have gains when you transfer the stock.  You can still donate stock you have losses in, but then it’s actually better if you sell the stock, donate the cash, and claim the capital losses.  You can’t claim losses on donated stock.  Also, make sure the gains are long-term gains (held for over a year) because if you sell stock that you held for less than a year, you can only value it at the cost at time of purchase.  For example, if you bought stock at a cost of $5k and it went up to a value of $6k 3 months later when you donate it.  You can only deduct $5k in your taxes.  While it’s good for the charity that they get $6k worth of stock for your $5k investment, for you it’s like you just donated $5k in cash (not $6k).

Know what the stock is worth when you donate it

I know this sounds like a no-brainer, but if the value of the stock is fluctuating around the cost when you first bought it, you don’t know if it will take a nose-dive right before you actually make the transfer.  If you’re this close anyway, you may just want to avoid the hassle of reporting the stock donation on tax form 8283 and just donate the cash.  Also, and this took some searching because my broker didn’t even know, the price that you set for the value of the stock when you donate it is the average of the high and low value on the day that you trade the stock.  This matters less if you’re donating something that uses a NAV for the price because then it is just the NAV for the day (e.g. mutual funds).

It’s best if you itemize deductions

Obviously all this is predicated on the fact that you itemize your deductions.  If your donation is not large enough or if you don’t have enough other deductions to make itemizing worthwhile, then none of this matters in terms of maximizing your tax benefit, other than simply not having to pay capital gains.  You may just want the charity to benefit from your good fortune, which is more than a good enough reason to do it.

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