Is it better to give stock or cash to a charity? Do I need to do anything special to give stock?
The best strategy depends on whether the stock has increased or decreased in value since you bought it and whether you've owned it for more than a year. Here are five things to know about giving stock to charity to get the maximum tax break.
1. Giving appreciated stock you’ve held for more than a year is better than giving cash. If you donate stock that has increased in value since you bought it more than a year ago – and if you itemize deductions -- you can take a charitable deduction for the stock’s fair market value on the day you give it away. You’ll also avoid capital-gains taxes on the increase in value over time, which you would have had to pay if you sold the stock then gave the charity the cash proceeds. You can deduct the fair market value only if you hold the stock for more than a year before giving it away. If you’ve held it for less than a year, your deduction is limited to your cost basis -- what you paid for the stock -- not the current value.
2. If it’s a losing stock, it’s better to sell it and give the cash. If the stock has lost value, it’s better to sell the stock first and give the cash to the charity. You’ll still be able to deduct your charitable donation if you itemize, but you’ll also be able to take a capital loss when you sell the investment.
3. Ask the charity and brokerage firm about the procedure and time frame for giving stock. Most banks and brokerage firms require a letter of instruction or letter of authorization to transfer the shares to charity, and a mutual fund company may have a special form. It’s a good idea to start the process at least a week before December 31, so the transfer has plenty of time to be completed during the holidays. Jane Wilton, general counsel for the New York Community Trust, recommends transferring mutual fund shares a few weeks earlier. “Some mutual fund companies are faster than others,” she says.
4. You can buy extra time with a donor-advised fund. If you’d like to transfer shares when the value reaches a certain level but want extra time to decide which charity to support, you could give the stock to a donor-advised fund. You usually need $5,000 to $10,000 to open a donor-advised fund at a brokerage firm, mutual fund company or community foundation. You can take a charitable deduction when you give the shares to the donor-advised fund, but you have unlimited time to decide which charities to support. The donor-advised fund may also accept privately held stock, real estate and other complex investments. See Donor-Advised Funds: Tax Break Now, Charity Later for more information.
5. The timing may be tricky if you donate your required minimum distribution from a retirement account. If you’d like to transfer your RMD to charity, delay taking your RMD until Congress passes the law allowing it for 2015. For the past few years, people over age 70½ have been able to transfer up to $100,000 from their IRAs to charity tax-free. The gift counts as their required minimum distribution for the year, but it is not included in their adjusted gross income. This can be a great way to avoid having to pay taxes on your RMD if you want to support a charity, and it gives you a tax break even if you don’t itemize your deductions.
But Congress usually waits until the end of the year to extend the law. To count for the tax break, you generally need to transfer the money directly from the IRA to the charity, and you can’t touch it first. So it’s a good idea to wait until Congress approves the law for 2015 before taking your RMD. But if Congress still hasn’t acted by mid December, ask your IRA administrator how long you can wait and still meet your RMD deadline. If you don’t take the money by December 31, you may have to pay a penalty of 50% of the amount you should have taken but didn’t. See Tax-Free Transfers From IRAs to Charity Are Still on Hold for more information.
As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.
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