Interested in donating to charity? If you donate appreciated stock, your donations can provide you with valuable tax savings. Here’s what you should know.

A refresher on charitable contribution deductions

As we point out in a past blog, a common tax saving method, especially at year-end, is donating to charity. A donation to a qualified charitable organization can be deducted on Schedule A of your federal income tax return as an itemized deduction. Donations can be made in the form of cash, property or appreciated shares of stock.

Generally, it is much more beneficial to donate appreciated shares of stock rather than cash. When you donate appreciated securities you get two benefits:

1. A deduction for the Fair Market Value (FMV) of the stock (if you itemize)
2. You avoid the capital gain you would owe if you sold the stock.

Additionally, if you face the 3.8% net investment income tax (NIIT) or the top 20% long term capital gains rate, donating appreciated shares of stock can be particularly beneficial.

Picture this:

Carly purchased stock for $4,000 which has now appreciated in value to $10,000. Carly’s ordinary income tax rate is 37%, long term capital gains rate is 20%, and she itemizes deductions.

Carly considers selling the stock, in which case she would pay $1,200 in tax on the $6,000 gain. She is also subject to the NIIT, adding another $228 to the tax bill, so $1,428 in total.

If she instead donates the stock to charity, Carly will save $5,128 ($1,428 in capital gains/NIIT plus $3,700 from the $10,000 income tax deduction). Her federal tax savings would add up to only $3,700 if she donated $10,000 in cash.

Key considerations

• Donations of long-term capital gains property are subject to tighter deduction limits compared to cash donations. These limits are 30% of adjusted gross income for gifts to public charities and 20% for gifts to nonoperating private foundations.
• If you have stock that’s worth less than your basis, sell the stock to deduct the loss and then donate the cash proceeds to charity--that is more worthwhile than donating it.
• If you decide to take the standard deduction (rather than itemize deductions), you could lose out on this tax break. The standard deduction for single taxpayers in 2024 is $14,600 ($29,200 for married filing jointly/qualifying surviving spouse, $21,900 for Head of Household). That means that you won’t get the tax benefit of your donations if your total itemized deductions are below this amount.

Is there a specific tax deduction available for Massachusetts charitable contributions?

Yes, check out our blog, Tax Deduction Available for MA Charitable Contributions.

Interested in donating your stock? We can help you navigate the tax rules.