Give Appreciated Stock: 1 Donation = 2 Tax Benefits

When looking at your overall tax planning strategy, making donations to charity is a great way to not only help a great cause, but also get a tax break for your efforts. If you’re inclined to give cash, you should first consider another option that provides two tax benefits: Donating appreciated stock that you have held on to for at least a year.

How the Tax Savings Work

Publicly-traded stock that has been in your portfolio for more than one year is appreciated, meaning it is long-term capital gains property. By donating this stock to a qualified charity, you get not one, but two tax benefits: 1) You can claim a charitable deduction equal to the stock’s fair market value at the time of the donation, and 2) you can avoid the capital gains tax you would pay for selling the stock. If you are an investor potentially facing the 3.8% net investment income tax (NIIT) or the top 20% long-term capital gains rate this year, this strategy could be especially beneficial.

For example, you donate $10,000 of stock that you paid $3,000 for, your ordinary-income tax rate is 39.6% and your long-term capital gains rate is 20%. If you sold the stock, you’d pay $1,400 in tax on the $7,000 gain. If you were also subject to the 3.8% NIIT, you’d pay another $266 in NIIT.

However, if you instead donate that stock to charity, you save $5,626 in total federal tax ($1,666 in capital gains tax and NIIT plus $3,960 from the $10,000 income tax deduction). Your federal tax savings would be only $3,960 if you donated $10,000 in cash rather than the stock.

Keep in Mind

Keep in mind that donating of long-term capital gains property is subject to tighter deduction limits — 30% of your adjusted gross income for gifts to public charities, 20% for gifts to non-operating private foundations (compared to 50% and 30%, respectively, for cash donations).

Also remember to check your basis – don’t donate stock that has decreased in value. In that case, it is better to sell the stock and take your investment loss deduction and then give the proceeds in cash to the charity.

Looking to sell some appreciated stock, but worried about the tax implications? In that case, donating it to charity could be just the ticket.

Using this strategy is designed for the situation when you have a charitable intent, own appreciated securities held outside of retirement accounts and, of course, have enough itemized deductions that allows you to itemize.  The really good news is that this strategy works whether or not you are subject to alternative minimum tax.

Contact us today to learn more about strategies for reducing your overall tax burdens.

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