It's All About Balance

Donating appreciated stock to charity is one of the most tax advantaged ways to give. As you're doing good in the world, there's a major tax hack that you probably wish you would have known about years ago – at least I did. In the United States, whenever you earn any kind of income, Uncle Sam is there with his hand out as he wants his cut in taxes. After all, there's no such thing as a free lunch, right? (Economics 101).

So while you're at home day trading on Robinhood, keep in mind that you are going to have report and pay taxes on the gains of any stocks that were sold on tax day, April 15th.

For stocks held shorter than a year, you are subject to short term capital gains tax which is taxed at the same rate as your federal income tax rate, which can be as high as 37%.

Federal Income Tax Brackets

For stocks held longer than a year, you are subject to long term capital gains tax which can range anywhere between 0%-20% which is determined on income. However, in all cases, it's best to hold stock for longer than a year if you expect it to appreciate, otherwise you're subject to paying a higher percentage of taxes on it if you sell too prematurely.

Most people, though, don't know that you can actually save on taxes by giving to charity. And many more people don't know that you can save more in taxes by donating stock that has appreciated in value.

Let's take two scenarios of James and Monica who each have $1000 in cash and $1000 worth of stock that they purchased for $100 dollars and have held for over a year. They each make $90,000/year putting them in the 24% marginal tax bracket. Additionally, they both itemize deductions when filing their taxes. The only difference is James is donating $1000 in cash to his favorite non-profit and Monica is donating $1000 worth of stock to her favorite non-profit.

James

  • $1000 cash
  • $1000 worth of appreciated stock purchased for $100 held for over a year
  • $90,000 salary in the 24% tax bracket
  • Itemizes deductions when filing taxes
  • Donating $1000 cash

Monica

  • $1000 cash
  • $1000 worth of appreciated stock purchased for $100 held for over a year
  • $90,000 salary in the 24% tax bracket
  • Itemizes deductions when filing taxes
  • Donating $1000 worth of stock

Who do you think will have the higher tax savings? Before looking at these scenarios, it's very important that you understand the term cost basis. Cost basis is the price at which you purchased a share of stock.

Let's see how these two scenarios play out.

Scenario 1

James donates $1000 cash to his favorite non-profit. Since James is in the 24% bracket, his tax savings by donating $1000 in cash is $240 ($1000 deduction x 24% marginal tax rate).

James then decides to sell his stock on Robinhood for $1000. James purchased this stock for $100 (his cost basis), so he gained $900 through this transaction. As a result, he ends up having to pay $135 in long term capital gains taxes ($900 capital gain x 15% long term capital gain tax rate).

As a result of James giving cash and selling his stock, he nets $105 in savings ($240 savings on cash donation - $135 tax on long term capital gains).

Scenario 2

Monica donates $1000 worth of stock to her favorite non-profit. Since Monica is also in the 24% tax bracket, her tax savings by donating $1000 in stock is $240 ($1000 deduction x 24% marginal tax rate). This is the same amount that James also saved when he gave to his favorite charity.

Now, let's say Monica still wants to own the stock that she just donated to charity, so she takes the $1000 in cash that she has and repurchases the same amount of stock she donated at the current price of $1000.

What Monica just did here is very critical for you to understand this tax hack.

When Monica took her $1000 in cash and repurchased the stock at the current price of $1000, she reset her cost basis (price which the stock was purchased). Previously Monica purchased the shares that she donated for $100 (her original cost basis), however since she gave those away, and repurchased the same amount of stock at $1000, she reset her cost basis.

Going forward, if Monica ever wants to sell her stock in the future, she will only have to pay capital gains tax on the difference between the future value and her new cost basis of $1000. As a result, Monica's net savings remains at $240 while James only saved $105.

As you saw through this illustration with James and Monica, donating appreciated stock is indeed the most tax advantaged way to give while also being generous to your favorite charities.

Overflow is the only platform that allows you to frictionlessly donate stock to non-profits and take advantage of the amazing tax benefits. The gift that keeps on giving.