Once you hit the highest marginal tax rate, 37 cents of every additional dollar you make goes to the government. And that’s just the federal rate! If you live in a state like California, Oregon, or New Jersey you can add double-digit percentage points to your marginal tax rate. Heck, even Hawaii hangs another 10% if you make over $175,000. 

This is where charitable donations come in. Allowing you to impact the world while protecting your wallet. Let’s discuss why donating stock, instead of cash, will probably be better for both you and the charity. 

What are the tax benefits of donating?

If you own the stock for less than a year, you can only write off the lower basis amount.

There are some limits: You can’t write off the full amount of a donation to organizations that are classified as private non-operating foundations by the IRS. In other words, you can maximize your donation’s tax impact when you contribute to public charities.

The math-backed reason why donating stock is more beneficial than donating cash

Let’s say you own 1,000 shares of Netflix that you bought for $150 more than a year ago. Now, you can donate them for $365 per share. Your cost basis is $150,000 and the fair market value is $365,000.

You had a huge bonus this year and decide to donate the position. If you sell the stock, you’ll have to pay 20% capital gains tax on the $215,000 gain ($365,000 FMV – $150,000 original cost basis). Your total donation will be the proceeds of $365,000 less the $43,000 tax, or $322,000. 

The benefit of donating stock to charity is that you write off the full fair market value, $365,000, and don’t have to pay any capital gains tax. You’re happier, and the charity is happier. 

When you shouldn’t donate stock

Donating stock is nice in theory, but it can become a hassle at tax time. Keep these three items in mind to make sure donating the stock will be worth it: 

Don’t donate a position that has lost money

If you donate a position that has lost money, you’ll only be able to write off its current value. It’s better to sell the stock first so you can report the capital loss on your taxes. Then, donate the cash proceeds of the sale.

Don’t donate small amounts

The standard deduction in 2022 is $12,550 for a single person and $25,100 for a couple filing jointly. To be able to write off a stock donation, you have to forego the standard deduction and itemize. 

If your total itemized deductions are less than the standard deduction, you gain no tax benefit from the donation. You’re better off waiting and donating in a year when you would breach the standard deduction.  

Don’t wait too long

There’s also an upper limit for donations. The IRS doesn’t allow a one-stock deduction of more than 30% of your adjusted gross income (that figure bumps up to 50% for the aggregate of multiple stock donations and 60% for cash donations). Find the middle ground between donating your whole portfolio at once and donating a few shares here and there to get the best tax benefit. 

Tips for donating stock or cash

If you want to reap the most tax benefits of donating stock to charity, keep these three tips in mind. 

Use a Donor-Advised Fund

With a donor-advised fund, you write off the funds that are transferred into the account, when you make the transfer, and then choose charities to donate the money to over time.

Reset your cost basis

You can be strategic with your donations. Use them to reset your cost basis. 

Let’s look back at the Netflix example above. You love Netflix as a company, and want to chill with it long-term, but you know that you’re in for a massive tax bill whenever you decide to sell the stock. You can reset your stock basis by donating part of the position and rebuying the shares. 

Let’s say you choose to donate half the position. That year, you write off the donation of $182,500 and then buy 500 shares for $182,500. You’re able to increase your cost basis for the total position from $150 to $257.50 [(150/2)+(365/2)], donate to a charity that you believe in, and have no net cash outflow because of the tax savings. Win-Win-Win. And no, the wash-sale rule doesn’t apply here.

Invest in high-growth stocks

This tip may seem a little too heavy on the tax avoidance and less focused on the charitable aspect, but if that’s what you’re looking for … here you go. 

If you know you’ll want to donate some stock a few years from now, because you’ll be up for a big promotion or need to cancel out windfall profits on another investment or need a foundation president to prove an alibi, you can start investing now for a future write off. 

The key is to focus on risky investments, like high-growth momentum stocks. These stocks usually have binary outcomes over the medium term; they either go up a ton or they fall to basically zero. In both cases, it works out for you: If they go up a ton, you get to write off far more than you invested. If they fall to zero, who cares? You set the money aside years ago anyway (and can now write off the capital loss).  

It’s (not?) all about the Benjamins

If you feel the need to shower the yuck off after reading that last strategy, you’re not alone. If you would feel totally fine doing it and think it’s a good way to minimize your tax bill, you’re also not alone. Whatever your persuasion, know this: The more strategic you are with your donations, the higher your charitable giving will be.