Why sell shares when you can gift them? If you have appreciated stocks in your portfolio (and you hold them in a non-qualified account that doesn’t get special tax treatment), then you might want to consider donating those shares to charity rather than selling them someday.
Why, exactly? Donating appreciated securities to a tax-exempt charity can result in a pair of tax breaks. If you have held the stock for more than a year, you can deduct the fair market value of the stock in the year that you make the donation. If the charity is tax-exempt, it won’t face capital gains tax on the stock if it sells it in the future. Again, this is all provided you donate the shares to the charity out of a non-retirement account (and not out of a qualified retirement plan such as an IRA).1
When is donating stock a better choice than gifting cash or just selling the shares? Two reasons may motivate you to donate highly appreciated stock to a tax-exempt charity. One, if you own too much company stock or your portfolio isn’t very diverse, it can give you a chance to reduce overweighting in one stock or sector. Two, it might be a smart tax move if you own a number of low-basis stocks.
If you just hand some cash to the tax-exempt charity, the tax benefit is certainly significant. Cash gifts are deductible up to 50% of AGI, and that lowers their net cost for a donor. As an example, if a donor in the 35% tax bracket gives a 501(c)(3) non-profit organization a gift of $5,000, the net cost can work out to just $3,250 with $1,750 realized in tax savings.2
If you donate highly appreciated securities that you have owned for at least one year, the tax benefit can be even more significant. You can deduct the full fair market value of the securities (up to 30% of your AGI) and the unrealized gains won’t be taxed either. So the more the stock appreciates, the greater the potential capital gains tax break down the road.2
If you sell shares of appreciated stock from a taxable account and subsequently donate the proceeds from the sale to charity, then you face capital gains tax on the gain you realize, which effectively trims the tax benefit of a cash donation.3
If you donate shares of depreciated stock from a taxable account to a charity, you can only deduct their current value, not the value they had when you originally bought them – so there is far less merit in doing that.3
Remember the federal tax rules for charitable donations. If you donate highly appreciated stock to a charity, make sure to abide by the rules set down in IRS Publication 526, Charitable Contributions. Double-check to see that the charity has legitimate non-profit status under federal tax law, and be sure to record the deduction on a Schedule A that you attach to your 1040.4,5
If your contribution totals $250 or more, the donation(s) must be recorded – that is, the charity needs to give you a written statement describing the donation and its value and whether it is providing you with goods or services in exchange for it. (A bank record or even payroll deduction records can also denote the contribution.) If your total deduction for all noncash contributions in a tax year exceeds $500, then complete and attach Form 8283 (Noncash Charitable Contributions) to your 1040 when filing. If you donate more than $5,000 of property to a charity, you will need to provide a letter from a qualified appraiser to the charity (and by extension, the IRS) stating the monetary value of the gift(s).4,5
To learn more about donating highly appreciated stock, contact a Boulay advisor at 952-893-9320 or learnmore@BoulayGroup.com.
File Download: Donating Highly Appreciated Stock
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This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 - raymondjames.com/thorsenwealthmanagement/pdfs/charity_article.pdf. [10/12/12]
2 - purdue.edu/giving/fed_tax.html [6/10/14]
3 - money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2013/09/26/how-to-give-stock-to-charity-2 [9/26/13]
4 - today.com/money/charitable-giving-how-you-can-donate-cause-benefit-tax-time-2D79751463 [6/3/14]
5 - irs.gov/uac/Eight-Tips-for-Deducting-Charitable-Contributions [11/4/13]