If you are planning to make a relatively substantial contribution to a charity, 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 comes from the general rule that the deduction for a donation of property to a 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 such as stocks. A qualified appraisal is not required for publicly traded securities for which market quotations are readily available.
Here’s how it works:
Joe and Julie are twins, both attended XYZ University. They each plan to donate to the school.
Each also owns $10,000 worth of stock in ABC, Inc. which they bought for just $2,000 each several years ago.
Joe 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.
Julie 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.
While this plan works for Julie, it will not work if she’s only had the stock for a year. In that case, 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.
Disclaimer: The items included in the Tax Tip Tuesday Video Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation. IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advise contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.