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Donate Stock Tutorial
Advantages of Donating Stocks and Mutual Funds
Many donors choose to make gifts to North Shore Animal League America using long-term appreciated stocks and mutual funds due to the attractive tax advantages associated with such gifts.
The benefits available to you when making a contribution of stock or mutual funds may include:
- Avoiding federal and state tax on the capital gain.
- Receiving an income tax deduction (federal and most states) for the full market value of your gift if you itemize deductions on your tax return and have held the assets one year or longer.
- Making a larger gift at a lower original cost to you.
Before you make a gift of appreciated securities, however, you should consult your financial planner or tax advisor to determine how the potential tax advantages described here apply to your specific situation.
Here's an example of how it works
Say, for example, you purchased stock that cost you $1,500 several years ago, that is now worth $5,000, and that if sold would result in a capital gain of $3,500. If you donate the stock, the Tax Code permits North Shore Animal League America (as a "Section 501(c)(3)" charitable institution) to sell the stock without having to recognize the capital gain.
If you donate the stock directly to North Shore Animal League America, you will avoid paying federal capital gains tax of $525 ($3,500 x 15% = $525). And let's assume you live in one of the states that also taxes capital gains. Assuming a 5% state capital gains tax rate*, you would avoid an additional $175 ($3,500 x 5% = $175) in taxes. This results in a total capital gains tax savings of $700.
Let's further assume you fall in the 28% federal income tax bracket. By itemizing your deductions, you are eligible to take a $5,000 charitable income tax deduction that saves you an additional $1,400 ($5,000 x 28% = $1,400) of federal income tax for the tax year you made the gift. If your state allows you to deduct charitable gifts, you can also save on your state income taxes. Assuming a 5% state income tax rate, this results in an additional savings of $250 ($5,000 x 5% = $250) for you.
In this hypothetical example, by making a stock or mutual fund donation, you are able to make a $5,000 gift that generates a total tax savings of $2,350. A direct contribution of $5,000 in cash would generate an income tax saving of $1,650. And if you were to sell the securities first and then donate what's left after paying taxes, you would only be able to donate $4,300 ($5000 less $525 + $175), which would generate income tax savings of $1,419 ($1,204 + $215). Donating long-term appreciated securities is clearly the tax-efficient way.
The Table below summarizes the example:
|Sell $5,000 in securities and
donate cash proceeds
|Donate $5,000 cash||Donate $5,000 in securities|
|Federal Capital Gains Tax Paid||$525||$0||$0|
|State Capital Gains Tax Paid||$175||$0||$0|
|Total Tax Paid||$700||$0||$0|
|Federal Capital Gains Tax Saved||$0||$0||$525|
|State Capital Gains Tax Saved||$0||$0||$175|
|Federal Income Tax Saved||$1,204||$1,400||$1,400|
|State Income Tax Saved||$215||$250||$250|
|Total Tax Saved||$1,419||$1,650||$2,350|
|After-tax "cost" of a $5,000 donation||$3,581||$3,350||$2,650|
* More than 80% of the 50 States levy a tax on capital gains that can be as high as 12%.
Important facts to remember:
- You must itemize your tax return in order to deduct a charitable donation.
- You must have owned the securities for at least one year before donating them, or you will be limited to a deduction of your original purchase cost of the securities.
- You may take a deduction valued up to 30% of your Adjusted Gross Income. If the deduction is greater than 30%, you may carry any unused deduction forward for up to five years into the future until it has been fully used.
- We encourage you to consult your financial planner or tax advisor who can assist you in evaluating the tax advantages available to you when making a donation of appreciated securities.