When many people think about charitable giving, they picture writing a check or dropping off a cardboard box of nonperishable food items at a designated location. But giving to charity can take many different forms. One that you may not be aware of is a gift of appreciated stock. Yes, donating part of your portfolio is not only possible, but it also can be a great way to boost the tax benefits of your charitable giving.
No Pain from Gains
Many charitable organizations are more than happy to receive appreciated stock as a gift. It’s not unusual for these entities to maintain stock portfolios, and they’re also free to sell donated stock.
As a donor, contributing appreciated stock can entitle you to a tax deduction equal to the securities’ fair market value — just as if you had sold the stock and contributed the cash. But neither you nor the charity receiving the stock will owe capital gains tax on the appreciation. So you not only get the deduction for the fair market value, but also avoid capital gains tax.
The key word here is “appreciated.” The strategy doesn’t work with stock that’s declined in value. If you have securities that have taken a loss, you’ll be better off selling the stock and donating the proceeds. This way, you can take two deductions (up to applicable limits): one for the capital loss and one for the charitable donation.
Inevitably, there are restrictions on deductions for donating appreciated stock. Annually you may deduct appreciated stock contributions to public charities only up to 30% of your adjusted gross income (AGI). For donations to nonoperating private foundations, the limit is 20% of AGI. Any excess can be carried forward up to five years.
So, for example, if you contribute $50,000 of appreciated stock to a public charity and have an AGI of $100,000, you can deduct just $30,000 this year. You can carry forward the unused $20,000 to next year. Whatever amount (if any) you can’t use next year can be carried forward until used up or you hit the five-year mark, whichever occurs first.
Moreover, you must have owned the security for more than one year to deduct the fair market value. Otherwise, the deduction is limited to your tax basis (generally what you paid for the stock). Also, the charity must be a 501(c)(3) organization.
Last, these rules apply only to appreciated stock. If you donate a different form of appreciated property, such as artwork or jewelry, different requirements apply.
A donation of appreciated stock may not be the simplest way to give to charity. But, for the savvy investor looking to make a positive difference and manage capital gains tax liability, it can be a powerful strategy.
Please contact our firm for help deciding whether it’s right for you and, if so, how to properly execute the donation.