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Why Donate Stock?

by Valerie Tompson | Executive Director

Does it make sense to donate stock?

I often get questions regarding the “why” of donating stocks to the church. Donating stock is a tax efficient option depending on your answers to the following questions:

      • Do you plan to itemize your tax deductions this year (as opposed to taking the standard deduction)? 
      • Do you own stock?
        • In the form of an exchange traded fund (“ETF”), a mutual fund, or individually that has experienced significant long-term (>1 year) appreciation; and
        • In a brokerage account that is not an IRA, 401k, 529, or similar tax advantaged account?

    If so, this could be of interest to you.

    Donating stock that has a significant long-term gain allows you to give more than if you sold the stock and then made a cash donation. If you sell the stock, you pay long-term capital gains taxes (maximum federal rate is 20%).  If you donate it, you do not pay these taxes.

    Example:

    You invested $4,500 in an S&P 500 index ETF at the end of 2022 and it is now worth about $7,000.  You wanted to donate $7,000 this year. Here is how the math would work out:

      1. Sell ETF for $7,000 and pay taxes on gain ($7,000 – $4,500 = $2,500 gain x 20% tax rate = $500 tax).  Available net cash proceeds for gifting would be $6,500 ($7,000 gross proceeds – $500 tax = $6,500).  Only $6,500 is tax deductible.
      2. Donate ETF directly to City Church (or any charity or donor advised fund).  Do not pay $500 of taxes and $7,000 is tax deductible. City Church does not pay capital gains tax either due to its standing as a 501(c)(3).
       
      In this example, you would be able to give 8% more by directly donating the ETF vs selling the ETF and then donating net proceeds. It works the same with appreciated stock.

      It is helpful to remember that you can always use the cash you would otherwise donated to buy the ETF or stock back at the same time you are donating.  And then your new tax basis in the ETF or stock would be stepped up (from $4,500 to $7,000 using the example above) and you would not ever pay the capital gains tax on the step up in your basis ($500 in the example above). 

      You can donate multiple stocks and choose exactly what shares to donate (note: always choose shares with lowest basis).

      If you plan to utilize this strategy more in the future, consider opening a donor advised fund to take the hassle out of donating stock.  Many large financial houses (like Fidelity, Charles Schwab, etc) have this option.  A donor-advised fund is like a charitable investment account which can be used exclusively to support charities.  Stock donations go directly into your donor advised fund and then you instruct the fund to donate to the charities you care about – who, how much, when, and even specific instructions like operating budget or building fund. This also makes tax preparation easier.

      Contact Valerie Tompson for any questions or for the details on how to donate stock directly to City Church.

       

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      Valerie Tompson
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