May 2, 2008

Give stock to charity and save money on taxes.

The idea for this topic was prompted by reading the article 'My Tax Mess' on Free Money Finance discussing his tax issue. FMF donated some mutual fund shares to a charity last year.

If you have an asset like a stock or mutual fund that has increased in value then it may save you some extra tax dollars to donate that asset to a charity instead of giving the charity cash.

Lets look at an example. Lets say you routinely give $1000 a year to your favorite charity and you have some Exxon stock that you bought a few years ago that you're planning to sell this year. Lets also assume your federal marginal tax rate is 28%.

Giving cash: If you give your charity a cash gift then you'd give them $1000 and deduct that from your taxes and save $280 on your tax bill. When you sell that Exxon stock you end up paying capital gains taxes. You bought 50 shares of the stock in 2003 when it was trading for $35 a share and not its going for $94 now. So if you sell your 50 shares you'll get $4700 and owe capital gains on $2950 of that. Your capital gains tax bill will be $443. Between the donation and your stock sale, your charity gets $1000 and you walk away with $3537.

Giving Stock: If on the other hand you gifted the Exxon stock directly to the charity you can avoid that capital gains tax bill AND still benefit from an income tax deduction from the gift. Lets say you gift 11 shares of your stock straight to the charity thats a gift value of $1045. That leaves you with 39 shares of stock you sell for $3705. Your capital gains bill on that is $210. So if you gift stock your end result in this example is the charity gets $1045 and you walk away with $3787 after taxes.

United Way's website has a calculator that shows side by side comparisons of gifting stock versus cash if you want to play around with other examples.

Of course this only works if you owe taxes on the stock. If you had instead bought Washington Mutual in 2003 instead of Exxon you would have about $28 /share loss for that stock. Gifting your WAMU to your charity would potentially hurt your tax situation cause if you sell that stock you could write off the loss.

So in summary if you have stock you're looking at selling and give money to charity then you should consider the option of gifting the stock to the charity outright.

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