by Carrie Schwab-Pomerantz, CFP®, President, Charles Schwab Foundation; Senior Vice President, Schwab Community Services, Charles Schwab & Co., Inc.
October 5, 2011

Dear Carrie,

Is it better to gift stock or cash to a charity or university?

—A Reader

Dear Reader,

Especially in tough economic times like these when people in general have less to give, charities and universities welcome any type of donation—cash or stock. And from a tax perspective, the giver gets a tax deduction for the gift either way. However, your question raises an interesting issue. A donation of stock could very well be the best choice for both you and the cause you want to support. It all depends on whether the stock you're considering donating has appreciated or depreciated and how long you've held it. Let's look at the different possibilities.

The case for cash
Cash can be the simplest. You write a check, it's done. If the recipient is a qualified nonprofit or educational institution, you can probably get a tax deduction for the full value of your gift, up to 50 percent of your adjusted gross income (if you're really generous, any amount over the AGI limit can be carried forward for five years). You just need to get a receipt for your donation and itemize your deductions on your tax return.

Why appreciated stock can be a better alternative
Although a cash donation is always well-received, giving a gift of appreciated stock that you've held for a year or more is even better, not only for your tax situation—but for the charity's bottom line as well. Here's why.

Let's say that several years ago you bought 100 shares of a stock at $10 a share and it's currently worth $50 a share. Now you want to make a gift to your alma mater. If you sell the stock first, you'll have a long-term capital gain of $4,000. Assuming you're in the 15 percent federal long-term capital gains tax bracket, that takes a $600 bite out of your donation (not including state income taxes, if applicable)—lowering the value of your gift (and your tax deduction) to $4,400. You and the charity both lose out.

However, if you were to give the appreciated stock directly to the university, the university would get the total $5,000 market value of the stock—and you can claim the total amount as a charitable contribution on your taxes. Plus, if your alma mater hangs on to the stock and it goes up in value, so much the better for the school.

When stock has depreciated
But if the stock has gone down in value, it's a different story. If, for instance, the price of the 100 shares you bought has gone down to $5 a share, it would be better for you to sell the stock first and then donate the proceeds. That's because by selling at $5 per share, you realize a $500 long-term capital loss, which you can claim on your tax return (or bank for future years). Plus, you can still claim the $500 value of the gift as a charitable deduction. If you give the depreciated stock directly, you won't be able to claim the loss.

A few caveats on giving stock
While giving appreciated stock has many advantages, here are some important considerations:

• Be sure you've held the appreciated stock for more than a year. Otherwise, it's considered a short-term holding and you'll only be able to deduct the purchase price (in this case, $1000), not the full market value.
• Make sure the charity or university is approved by the IRS so you can get the tax deduction.
• Ask if the organization is set up to receive the stock. Your broker can help you with any necessary paperwork.
• If you're considering making a large donation, be aware that the IRS has limits on how much you can donate relative to your adjusted gross income. IRS Publication 526 is a good resource for current donation limitations.

Benefits of a charitable gift fund
To make giving even simpler, consider a Charitable Gift Account (also known as a donor-advised fund) offered by many major financial institutions. You can sometimes open this type of account with a tax-deductible contribution of as little as $1,000 (appreciated stock is especially well suited for this) and then recommend grants to any public charity over the course of years. You get an upfront tax deduction and the fund manages the money to potentially increase its value, which would ultimately increase the value of your gift.

Giving, of course, is about more than tax planning. But by exploring how best to maximize your tax benefits as well as your contributions, you can create a win/win situation for both you and the charities you want to support.


(1011-6412)