Below is excerpted from a previous article titled “Donating Stock To The VRG,” by Roger Lowe.

Updated by Steven Kaplan

The purpose of this article is to encourage you to consider creative ways to donate to The Vegetarian Resource Group or other nonprofits for outreach projects. It is not intended to be used for financial, tax, or legal advice. Each person’s financial and tax situation is unique, and the information in this article may not apply to your situation. Please note that there are numerous proposed tax laws that may change, or may have changed as of the printing of this article.

Before donating stock to The VRG or any other nonprofit, you may want to consult with a financial or tax professional to discuss how such actions may affect your tax liabilities.

Donating Stock May Increase the Size of Your Gift

Many people who think they have little in the way of disposable income may have considerable stock holdings that they’ve acquired through inheritance or regular contributions to a mutual fund. Perhaps they have accumulated stock through an employee stock ownership plan, or through stock options that some companies offer employees in lieu of larger salaries.

These stockholders may not have large salaries or substantial amounts of cash on hand. Perhaps they are very committed to The Vegetarian Resource Group and its mission, and would like to make a donation, but a large cash gift, for whatever reason, is unfeasible.

For example, let’s consider the Smiths, an imaginary family of four, whose annual household income is $50,000. The Smiths are very committed vegans and live frugally. Their $50,000 income must cover a mortgage, child care, health insurance, contributions to a 401(k) plan, and savings for future expenses. The Smiths donate $1,000 to The VRG every year for promotion of vegetarian options in restaurants and other food service venues. They would love to be able to make a larger gift of $10,000, but their other obligations make that seem impossible.

However, ten years ago Mrs. Smith inherited 1,000 shares of stock in Yummy Veggie Dinners Inc. The shares are in the Smiths’ brokerage account. Since her inheritance, these shares have increased in value from $2,000 to $10,000, an impressive $8,000 gain.

While she would like to make a substantial gift to The VRG, it has never occurred to Mrs. Smith to donate stock. Yet by doing so, she can make that $10,000 gift she could not otherwise afford.

Even though the Smiths could never manage a cash gift of this magnitude, once they consider their stock holdings, their giving capacity increases significantly. They are now able to help The VRG, while leaving their 401(k) and savings plans untouched.

Substantial Tax Savings

Consider the Smiths’ case. If they sell their 1,000 shares of stock and donate the proceeds, they would have to first pay tax on the $8,000 profit. With a capital gains rate of 10% (for example), the Smiths would owe $800, leaving them with only $9,200 to donate to The VRG, instead of the $10,000 they’d planned.

The Smiths would be much happier if they could give the entire $10,000 to The Vegetarian Resource Group. Donating the stock directly allows them to do this.

Another tax advantage comes with the Smiths’ itemized deductions. If they sell the stock, pay the 10% capital gains tax, and donate the remaining $9,200, they can deduct that $9,200, yielding an income tax savings of $1,380 (assuming a 15% tax bracket). However, by donating the stock directly to The VRG, the full $10,000 can be deducted, for an income tax savings of $1,500. Both the Smiths and The VRG benefit from this arrangement.

When to Donate Securities:

The ideal time to donate any security is under the following two conditions: 1) you have a net gain on the stock, bond, fund, or other security; and 2) you have owned the security for at least one year and one day. You will not have to pay capital gains on the increase and the entire value of the donation will qualify for charitable contributions on Schedule A. If you have purchased that security at different times at different prices, your separate purchases (called lots) with the lowest prices will usually have the highest unrealized capital gains and are the shares you should donate.

For example, let’s say you have 300 shares of ABC. You bought 100 shares for 700 dollars. A few months later you bought another 100 shares of ABC for 500 dollars, and several months afterward you bought another 100 shares for 800 dollars. Now each 100 shares is worth 2,000 dollars or six thousand dollars altogether. If you are only donating 100 shares you should donate those you had bought for 500 dollars since those have the biggest capital gain which you won’t have to pay taxes on, and The VRG will get two thousand dollars which you can deduct on Schedule A.

If you have held a security for one year or less, or if you have a net loss, then do not donate it yet. Instead donate cash. Keep an eye on your security; as soon as it meets both of the above conditions then it will be worthwhile to consider for donation.

Steve Kaplan is a long time vegetarian. His website is at http://truecontrarian.com. He assists people with their taxes and investing.