For most people, charitable contributions are mostly about what matters most to them — a way to help those in need or to begin righting a wrong. However, charitable contributions are also an excellent way for some earners to reduce their tax burden. And if you’re interested in maximizing the benefit to both yourself and the organization you’re contributing to, donating stocks can be a win-win situation that’s hard to pass up. Find Out: Tax Year Deadline Dates You Need To Know In fact, donating your stock can allow you to avoid paying capital gains taxes on your returns, ultimately making for a larger contribution for the nonprofit and a larger deduction for you.[x No. 3] So, while donating a stock might not be your first impulse, there are a number of reasons why you should seriously consider it.
Donating Appreciated Stock to Charity
Donating stock to charity offers a win-win for both you and the organization you’re donating to. A donation of stock allows you to deduct the full market value of the
stock from your taxable income. Essentially, you’re taking a capital gain that you
would otherwise owe taxes on and converting it into a deduction that will save you
taxes on your annual salary, so you’re avoiding taxes in two places. And the charity
gets a larger donation than it would have received had you sold the stock and paid
capital gains tax prior to making your donation.
Save for Your Future
There are some rules, though, dictating just how much tax benefit you can claimfrom a donation of stock. The first important consideration is the cap on charitable deductions. Generally, you’re allowed to reduce your taxable income up to a maximum of 50% of your adjusted gross income with charitable non-cash contributions. However, that cap is reduced to 30% for donated stocks that you held longer than one year and would have been subject to capital gains taxes had
you sold it at fair market value. You also should consider your other charitable contributions as the 50% cap on deductions applies to your total combined contributions. So, if you’ve made a donation of stock that’s 30% of your taxable income and donations of cash that are another 40% (wow, good for you!), you would only be able to deduct a portion of your cash contributions before hitting the donation maximum. In that case, your tax advisor can let you know whether you should save some of that cash to donate in the next tax year.
Find Out If You Can Really Write Off That Holiday Donation
How to write those donations off right!
Your charitable giving can benefit you, too, if you take a charitable contribution
deduction. By claiming charitable donations as tax deductions on Form 1040,
Schedule A, Itemized Deductions, instead of claiming the standard deduction, you
could even lower your taxable income. Be Prepared: All the New Numbers You Need To Know for Planning Ahead on Taxes The IRS website has a tool to help you calculate your standard deduction. Use either the standard deduction amount or the total itemized deductions, whichever results in the lower amount of tax you’d owe.A New Way to Deduct Charitable Donations
The Tax Cuts and Jobs Act of 2017 removed the limitation on itemized deductions.
That means you can deduct as much as legally possible for tax year 2020, same as for 2019 and 2018. Even still, nearly nine out of 10 filers still take the standard deduction, which saw a big increase from the Tax Cuts and Jobs Act. Choosing the standard deduction had always precluded taxpayers from claiming charitable donations as itemized deductions–until now. The CARES Act created a special new tax law to encourage desperately needed charitable giving during the pandemic. The new provision allows filers to deduct cash donations up to $300 made to qualifying charities before Dec. 31, 2020, even if they claimed the standard deduction.
Qualifying Organizations for Charitable Tax Deductions
Donations are eligible for tax write-offs only if you make them to qualified
organizations. “An organization has to have received the 501(c)(3) designation from
the IRS for it to qualify as a ‘charitable organization’ in terms of deduction donations
for tax purposes,” said accountant Eric Nisall, founder of AccountLancer, which
provides accounting, tax and consulting services for freelancers. “That means your
neighbor’s kid’s Little League team selling raffle tickets isn’t a tax write-off unless
the team holds that certification.” It’s a good idea to check first with the IRS’ Tax Exempt Organizations Search Tool, but generally, charitable gifts to the following types of tax-exempt organizations are tax-deductible donations:
- Churches, synagogues, temples, mosques, and other religious organizations
- Federal, state, and local governments, if your contribution is only for public
purposes, such as a gift to reduce the public debt or maintain a public park
· Nonprofit schools and hospitals
· The Salvation Army, American National Red Cross, CARE, Goodwill Industries,
United Way, Boy Scouts of America, Girl Scouts of America, Boys & Girls Clubs
of America, and others
· War veterans’ groups
· A non-profit volunteer fire company
· Expenses you paid for a student living with you who is sponsored by a
qualified organization
· Out-of-pocket expenses for serving as a volunteer for a qualified organization
You can claim only the “fair market value” of each item. According to the IRS, fair
market value is “what a willing buyer would pay a willing seller when neither has to
buy or sell and both are aware of the conditions of the sale.” The IRS doesn’t provide
a formula for value determination, so you should consider all of the items’ factors,
including desirability and scarcity.
Charitable to take advantage of two major benefits:
1. Take an income tax deduction for the fair market value 1 of the private company
shares on the date of the contribution.
2. Potentially eliminate the capital gains tax 2 on the contributed shares by contributing
these shares directly to Fidelity Charitable.
There’s also a third benefit of donating privately held C-corp stock to a charity with a
donor-advised fund program such as the Fidelity Charitable Giving Account—the
opportunity to recommend how the contribution is invested on a tax-free basis,
potentially increasing the amount of charitable support over time.
1 Fair market value of the stock as determined by a qualified appraisal. Stock must be held for more than one year.
2 This assumes all realized gains are subject to the maximum federal long-term capital gains tax rate of 20%, as well as the Medicare surtax of 3.8%.
How does it work?
When you make an irrevocable contribution of long-term, privately held C-corp stock you will generally be entitled to a fair market value deduction for the charitable contribution, after which the proceeds become available to recommend grants to qualified public charities from your Giving Account..
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Kathy, a successful entrepreneur, was thinking about selling her garden center business to pursue other ventures. Her plan was to donate a portion of the proceeds to pay for preschool tuition for low-income children. A couple of firms showed interest in buying Kathy’s privately held C-corp, but the deal was not complete and terms are still being negotiated.
Maximize your charitable giving
Kathy knew that because she had built her business from basically nothing over the
course of her career, she would be facing a large capital gains tax when the sale was
complete.
Her financial advisor suggested that instead of selling the business and donating a
portion of the proceeds, she should contribute a 20% minority stake in the business
directly to Fidelity Charitable—helping to minimize her capital gains exposure and claim a higher tax deduction. This strategy would also allow Kathy to make a larger donation than she could have made had she only contributed the after-tax proceeds from the sale of her business.
Potential benefits of giving an interest in a company directly to Fidelity
Charitable:
· Provide more money to charities
· Minimize capital gains tax exposure
· Take a tax deduction
This hypothetical case study is provided for illustrative purposes only. It does not
represent an actual donor but is meant to provide an example of how a donor-advised fund can help individuals give significantly more for the causes they care about.
Non-cash assets accounted for the majority of donor contributions. Many donors made the tax-efficient move to donate strategic non-cash assets in 2019, like stocks and mutual funds, private equity, restricted stock and more.
