Since the financial markets have recently been at all time highs, now may be a good time to consider gifting appreciated stock to charity. This tax planning tool is derived from the general rule that the tax deduction for a donation of stock is equal to the fair market value of that stock. In addition to this tax deduction, the donor does not have to recognize gain on the donated stock.
The impact could be significant. For example, you decide to sell shares in ABC Corp., which cost $5,000 and is now worth $25,000. You will have to realize a gain on your tax return of $20,000. You now have to deal with Uncle Sam, and will be required to fork over $4,000 in federal taxes on your $20,000 gain (20% capital gains rate). You then take the remainder of these funds in the amount of $21,000 and write a check to a qualified charity for this amount. Assuming that you are in the 28% tax bracket, you will realize a tax savings of $5,880 on the charitable contribution deduction of $21,000.
If, on the other hand, you have made arrangements with a qualified charity to donate your shares of ABC Corp., directly to the charity, you will NOT have to realize any gain or pay any tax on the $25,000 transfer of stock to charity. In addition, you will receive a charitable contribution for the full $25,000 fair market value of the stock. And, assuming that you are in the 28% tax bracket, this $25,000 charitable contribution deduction will generate tax savings of $7,000.
As can be expected, there are a few rules that must be observed. While this works for property held more than one year, it will not work for securities held less than a year. If the shares were held for a year or less, the shares would be treated as “ordinary income property” for these purposes, and the charitable deduction would be limited to the securities’ cost. So remember that if you are considering the contribution of appreciated securities, you need to make sure that the shares have been held for more than one year and qualify for the “qualified appreciated stock” deduction. In addition, the gift of appreciated stock may subject you to the alternative minimum tax, or the donation may be limited by the itemized deduction phase-out.
You will also need to obtain an acknowledgment at the time you make the contribution from the qualified charity. Charitable contributions are not deductible unless they are substantiated in the manner prescribed by the IRS.
As circumstances vary between individuals, be sure to consult with your financial advisor regarding this strategy.
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