This is a simple example to demonstrate the potential tax benefits of donating stock instead of cash. Please consult your tax advisor to review your individual facts and circumstances. The tax savings realized will depend on multiple factors including your marginal tax rate, a comparison of your itemized deductions to the standard deduction, AMT taxes, capital gain tax rates and more.
Assume you have 100 shares of stock that you purchased 30 years ago, with a total market value of $50,000 and a cost basis of $5,000. Normally, if you sold this stock then you would be subject to capital gains taxes. For our example, let us assume the capital gains tax is 15% resulting in capital gain taxes of $7,500. However, if you donate the stock directly to a qualifying charity then the capital gains tax is completely avoided and you are still eligible to claim the charitable donation deduction of $50,000. In this case, you could avoid $7,500 of capital gains tax and also reduce your income tax by an additional $14,000 for total tax savings of $21,500. This is an effective tax savings rate of approximately 43%.
You could then use the cash you had planned on using for the donation to instead replace the donated stock by purchasing shares on the open market on the same date as the donation. This would put you back in the same financial position as if you had donated cash but allows you to realize the tax savings of donating stock.
Nick Wold, CPA