Tis the season for charity

One of the most joyous traditions I celebrate this time of year is shopping for charity. I fill a shopping cart with things my local shelter needs and haul a trunk full of goodies to them. It is the most meaningful trek of my holiday season. But it's tax inefficient, which means I have less to give; this year, I am reconsidering whether donating goods is the best way to support my local shelter.

If you are donating money this year, and you own appreciated stock, remember that you can donate stock instead of cash, and save on your taxes.

If you sold stock to free up cash for giving, you would pay taxes on any capital gains. But if you donate the stock directly, you don't have to pay tax on the capital gains - and you get to write off the full value of the stock.

Consider: You want to donate $1,000 to your local foodbank. You sell $1,000 in stocks to free up the cash. In April, you'll owe 15-20% of your gains to the IRS, plus whatever your state charges. In California, that's another 10%. For me, I'd owe 30%. Then you write off the donation, which would save you your regular tax rate (35% Fed, 10% state).

Donation: $1,000 cash
Tax on sale of stock: $300
Tax savings on donation: $450
Net cost: $850

Donation: $1,000 in stock, all capital gains
No Tax on sale of stock
Tax savings on donation: $450
Net cost: $550

Now, what if you like the stocks you own? Or, what if you were not going to liquidate stock to donate? Donate stock anyway - and then replace it with the same number of shares. This will allow you to do something you were going to do anyway (donate to charity), but to reset the cost basis on your stock holdings.

To get the most bang for the buck, donate the stock with the highest taxable gains.


Note: This is not financial advice. Please speak with your tax advisor to obtain details of the tax rule and determine how it applies to your situation.