Saving Money When Making a Charitable Contribution

If you usually make charitable contributions by cash or check, you may want to consider donating appreciated securities instead. It’s a great way to maximize you contribution while minimizing your out-of-pocket cost. The benefits are:

1. Maximizing tax savings.
2. Reducing your actual cost.
3. The charity gets exactly the same level of contribution.

Here’s how it works:

You contribute shares of appreciated securities that have been held for over one year directly to the charitable organization. Your broker or financial institution that holds your shares can do this for you. The charity that receives the securities will sell them immediately. You get to deduct the full sales value of the securities on Schedule A of your tax return.

Below are three options for contributing $100 using cash or appreciated stock and a comparison of the net cost to the contributor. The calculations assume a 25% marginal income tax rate and a 15% long term capital gains tax rate . It also assumes an 87% gain for the appreciated stock.

Option 1 - Cash
Donate $100 cash. Deduct $100 on your tax return. Tax savings = $25. Net cost = $75.

Option 2 – Sell Appreciated Stock and Donate Cash
Sell $107.5 (with $50 capital gain) stock. Pay $7.50 in taxes on the $50 capital gain. Donate $100. Deduct $100 on your tax return. Tax savings = $25. Tax on gain = $7.50. Net tax savings = $17.50. Net cost = $90. This is the highest cost option due to paying taxes on the realized capital gains. In addition, you may need to pay a commission for the sale of the stock.

Option 3 – Donate Appreciated Stock Directly
Donate $100 (with $46.51 gain) of appreciated stock. You may deduct the full $100, even though you haven’t paid taxes on $46.51 unrealized capital gain. You also have a tax avoidance of $6.98 since you pay no taxes on the $46.51 gain. Net tax savings = $31.98. Net cost = $68.02.

Brokerages (and I believe other financial institutions) will typically waive the transfer fee (typically $50 to $90) for a charitable contribution transfer, making the donation of appreciated shares even more attractive.