VOLUME 1, ISSUE 18 | November 1 - 30, 2006
“Cost” of Charity
Should You Donate Stock or Cash?
By S.W. Sherwin with Lisa Brandes
This is the season in which many of us are looking for ways to support our favorite charities. While the spirit may move us to make year-end gifts, many of us would also like to be able to maximize the amount of money we retain while still being generous. In order to serve these two goals when making a gift or fulfilling a pledge, you may want to consider using stock as opposed to cash — especially if the stock has appreciated (a capital gain) and been held longer than 12 months. The net cost of the gift, after considering tax issues, may be less in the case of stock.
Let’s say you want to make a gift of $1,000 to your favorite charity. Instead of giving cash, you give 10 shares of a stock currently trading at $100 a share. You have owned the stock for three years, and your basis in it (the original purchase price) is $10 a share; $90 a share represents a long-term capital gain. If you were to sell the stock, you would owe $135 in capital-gains tax ($90 x 15 percent x 10 shares). But since you pay no tax when you make a gift, in reality, your $1,000 donation only costs you $865 and yet the value to the recipient will be undiminished. A straight gift of cash, on the other hand, would cost the full $1,000. Hence the stock is actually less expensive for you to give than cash.
There’s a formula, though complicated, you can use to compute your “real” after-tax cost. For a donation of cash, the “cost” is equal to the gift minus your income-tax rate times the gift. If you’re in the 35 percent bracket, for example, your $1,000 gift will “cost” $650 ($1,000 minus $350). If the gift is one of long-term capital gains, like the example above, then the formula gets more complicated. It computes the “cost” the same as with a gift of cash, but then subtracts the potential capital-gains tax — because that is actually being “saved” when you make the gift of stock to a charity. In our example,* it would be $650 minus $135 — or a net cost of $515: It “costs” $650 to give the cash, but only $515 to give the stock. The difference? That $135 capital gains tax liability.
Of course it’s probably much simpler just to calculate your potential capital-gains tax liability — and then subtract it from your gift. That’s what you’re really saving. Making gifts of appreciated stock rather than cash can help save you money and help ensure that your favorite charity receives the funds you want it to have.
You may have many investments in your portfolio that could benefit some charity and not cost you as much as writing a check. Let’s celebrate this season by sharing some of what we have with others – and some with ourselves.
* The above computation is for illustrative purposes only and assumes a 15 percent capital-gains tax.
For more information, call (212) 878-3943 or e-mail lisabrandes@smithbarney.com.
