Donating to a charity is a powerful way to support the causes you care about. Nonprofit organizations like Islamic Relief USA (IRUSA) rely on contributions to fund their work, and your support can provide vital services like food, water, healthcare, shelter, and disaster relief to people in need around the world.
At the same time, donating to nonprofits with 501(c)(3) status can also bring the donor financial benefits, including tax write-offs that can reduce their tax liability and sometimes even move them into lower tax brackets.
However, many people don’t know that it’s possible to give more than just money to charities. For example, IRUSA accepts donations of stocks. If you’re interested in supporting them, here’s why you might want to consider this type of donation.
The Benefits of Donating Stocks
Any donation to a 501(c)(3) charity can reduce your tax bill, but donating stocks can actually be more advantageous. This is due to the capital gains taxes on any gains earned from the sale of those stocks. If you sold stocks and donated the proceeds, or donated cash and later sold stocks for gain, you would face the capital gains tax applied to all net gains derived from the sale of the stock. This must be paid even if you’re selling the stock with the intention of donating the proceeds. While you can write off the donation and reduce your income tax, the donation does not shield the funds from capital gains tax.
If you donate stocks directly to a charity—instead of selling them and donating the proceeds—no capital gains tax is paid, either by you or by the charitable organization that receives the stocks. The upshot is that a charity could get more value from the same donation, while the donor will also get a greater tax benefit.
The other advantage of direct donations of stocks is that you can reduce future capital gains liabilities by replacing the donated stock with new stock purchased at a higher price.
For instance, if you feel that a stock is going to appreciate and want to keep buying it, even at higher prices, you can donate the part of your stock holdings purchased at the lowest price, which will quite naturally appreciate most and thus when sold bring in higher capital gains tax liability. By donating that stock with the largest capital gains tax liability and holding on to, or buying, stock that has a higher purchase price—and hence a lower capital gain—you can minimize the amount of capital gains tax owed when and if that stock is ever sold.
A third advantage is that donating stock is relatively easy and effortless, especially if it involves a donor-advised fund. Rather than having to make separate donations to a variety of different charities, you can simply donate the stock directly into the donor-advised fund all at one time and take the tax benefit for doing so, then choose when and to whom you want to distribute the stock through individual donations at a later date, without the complications of having to process and certify the donation for tax purposes each time.
When It Isn’t a Good Idea to Donate Stocks
There are times when the best thing you can do is sell your stock and donate the proceeds. The simplest of these situations is when a stock has depreciated to less than the purchase price. Here, you can sell at a loss, which makes it deductible on future tax returns. Then you can donate the cash proceeds of the sale of the stock and write that donation off on your taxes. In this case, the charity receives the same dollar amount of the donation, whether the donation is in stock or in proceeds of a sale of stock. However, the donor receives a larger tax benefit from selling the stock at a loss and then donating the proceeds.
Another example of a situation where it’s not a good idea to donate stocks involves those stocks that are private or locked, or otherwise illiquid. Most charitable organizations that are in a position to accept stock donations—not all are—liquify the stocks immediately and use the cash proceeds to support their operations and projects. To the extent that the stocks cannot be liquified, they may not be good candidates for donation.
The Takeaway
Donations of stocks can benefit both you and the nonprofit organization you wish to support. It’s a way to amplify your contribution and help the nonprofit do more good in the world. Plus, the process for donating stocks is straightforward and requires minimal paperwork. To learn more about donating stock to IRUSA, see irusa.org/stock-donations.