Dear Dan,
Your article, “What’s the best way to give to charity?” piqued my interest. I have shares of stock that I’ve held for 20 years and are worth about seven times what I bought them for, so using those to make a donation is interesting to me. However, near the end you said there were some quirks. I’d like to hear more about those.
Thanks,
Cal
Dear Cal,
I’m happy to expound on a couple of the ins and outs of donating shares.
The first quirk to be aware of is that while donating appreciated shares is a good tax move, the nature of shares is different than cash. If you decide to donate, say $ 10,000 to a charity and stroke a check for $ 10,000, the charity gets $ 10,000, your net worth drops $ 10,000, and your tax deduction is based on $ 10,000.
Now, if you donate shares, it doesn’t work so cleanly because the value of the stock changes. You can calculate how many shares it will take to create a $ 10,000 donation but unless the price of the stock stays the same after you hit the “equals” button on your calculator, the charity is not going to get $ 10,000 worth of shares. Nonetheless, done right, the charity will get about $ 10,000, your net worth will drop about $ 10,000 and your tax deduction is based on the fair market value of about $ 10,000.
Read: Social Security taxes: There’s practically no escape from the 85% rate
If the price rises during the transfer process, the charity will sell the stock when received and could get more than $ 10,000. This is fine for most people. However, if the stock price declines, the charity might not get the $ 10,000 you wanted them to have. If the decline is relatively modest, most donors will write a check for the difference. Otherwise, they will usually donate additional shares to fulfill their pledge.
Most charities have a policy in place that mandates the shares be sold as soon as possible after receipt to reduce the possibility of a large fluctuation reducing their take. However, your deduction is based on the fair market value at the time of the donation, not what the charity gets whenever they sell the shares.
Most large, well-known charities have received shares at some point but some charities, typically smaller or new charities, have never received stock as a gift. Before donating, contact the charity and make sure it is a 501(c)(3) charity with a brokerage account already in place. Though some veterans organizations and volunteer firefighter groups are 501(c)(4)s and can receive tax deductible donations, most charities we donate to will be a 501(c)3. That status is what makes the donation deductible. You can verify a charity’s tax status here.
To receive publicly traded securities, the charity needs a brokerage account. Setting up a brokerage account for a charity is more involved than what you or I need to do to set up our own accounts. It isn’t terribly difficult but can take time based on how many people need to sign paperwork and the documentation needed by the brokerage firm so don’t start the process in late December!
Be sure to run things by your adviser before acting because there are limits on the size of your deduction and the limit for donating appreciated shares is lower than for cash donations. Also, in some cases, a donation has Alternative Minimum Tax implications.
Despite the quirks, donating shares can be a great tax move and worth considering if you have appreciated shares.
If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line.
Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some reader questions are edited to aid the presentation of the subject matter.