accounting and tax services

What’s better than giving? Giving and tax breaks combined! Charitable deductions for appreciated stock.

Planning on making a substantial contribution to a charity or college before 2018 ends?

You should consider donating appreciated stock from your investment portfolio instead of cash. Your tax benefits from the donation can be increased and the organization will be just as happy to receive the stock.

This tax planning tool is derived from the general rule that the deduction for a donation of property to charity is equal to the fair market value of the donated property. Where the donated property is “gain” property, the donor does not have to recognize the gain on the donated property. These rules allow for the “doubling up,” so to speak, of tax benefits: a charitable deduction, plus avoiding tax on the appreciation in value of the donated property.

Example: Taxpayer A and Taxpayer B are twins, each of whom attended a University. Each plans to donate $10,000 to the school. Each also owns $10,000 worth of stock in ABC, Inc. which he or she bought for just $2,000 several years ago.

Taxpayer A sells his stock and donates the $10,000 cash. He gets a $10,000 charitable deduction, but must report his $8,000 capital gain on the stock.

Taxpayer B donates the stock directly to the school. She gets the same $10,000 charitable deduction and avoids any tax on the capital gain. The school is just as happy to receive the stock, which it can immediately sell for its $10,000 value in any case.

Caution: While this plan works for B in the above example, it will not work if the stock has not been held for more than a year. It would be treated as “ordinary income property” for these purposes and the charitable deduction would be limited to the stock’s $2,000 cost.

If the property is other ordinary income property, e.g., inventory, similar limitations apply. Limitations may also apply to donations of long-term capital gain property that is tangible (not stock), and personal (not realty).

If you hold appreciated company stock from prior stock options or stock grants, this may be a strategy to offset the gain built into that stock while also achieving your charitable giving goals. The goal is to gift the property that has the highest objective dollar value of built in gain and work your way backwards from there. Remember however, if you are in a position to realize 0% capital gains in any year then this strategy would be a waste. Use this strategy in high-bracket years to balance gains and reduce your overall tax liability. Charitable giving is one of the few remaining itemized deductions under current law and can be used to great effect!

For personalized plans and gifting strategies, please contact our office to setup a consultation.

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