Donating Appreciated Securities – The Tax Gift that Keeps on Giving
December 19, 2013
Most people prefer to write a check for their charitable contributions because it is convenient, quick and simple. But if they have relatively large gifts and have appreciated stocks or mutual funds which they have held for over a year*, they are missing out on the enhanced tax benefits of donating securities.
Contributed by Laura Scharr-Bykowsky, CFP®, MBA
Most people prefer to write a check for their charitable contributions because it is convenient, quick and simple. But if they have relatively large gifts (of say approximately $10,000 or more a year) and have appreciated stocks or mutual funds which they have held for over a year*, they are missing out on the enhanced tax benefits of donating securities. When you gift appreciated securities you get bonus tax advantages over gifting cash. Not only do you get a deduction for the amount of securities donated, but you also eliminate any future capital gains on the sale of the security.
First, you receive a charitable income tax deduction equal to the fair market value of the donated securities. For large donations, you can receive a deduction in this year for up to 30% of your adjusted gross income and can then carry over the balance for up to five years. In addition, you are able to forgo the capital gains tax that you would have paid on the difference between your original purchase price and the current market value. Depending on your tax bracket, the capital gains tax could be as high as 23.8% (plus state capital gains taxes).
Donating appreciated securities may make sense for you if:
- You have a large concentrated position of an appreciated stock and want to reduce your exposure to risk and/or diversify your portfolio.
- You do not want to or cannot wait for the step-up in basis at death.
- You can’t find the purchase history for the security or it is too difficult to determine the cost basis.
Gifting stock may not make sense in the following situations:
- The securities have been held less than 12 months.*
- There is a relatively short time period until the step up in basis occurs at death.
- Even after the sale of securities, you are in the 15% tax bracket and would not have capital gains exposure.
- You do not itemize your deductions.
|Comparison of Donation Techniques||Donate Cash – Write a check||Donate Stock – Contribute securities directly to charity|
|Current fair market value of securities||$10,000||$10,000|
|Charitable Contribution/ Deduction||$10,000||$10,000|
|Net Cost of Charitable Deduction||$6,800||$5,600|
**Does not include state capital gains tax.
Here’s an Example
Mrs. Mary Smith, who is in the 25% marginal Federal tax bracket (32% including state taxes), wants to gift $10,000 to her favorite local charity. If she writes a check, her tax deduction is $10,000 and the net cost of her gift is $6,800. Now, suppose instead of writing a check, Mary donates $10,000 of a growth mutual fund or stock she bought 10 years ago for $2,000. She will still get a $10,000 income tax charitable deduction and reduce her taxes by the same $3,200. However, she now has avoided ever paying long term capital gains tax on her appreciation. With her tax bracket, she eliminates $1,200 of capital gains tax from being incurred. By gifting stock instead of cash, the total taxes avoided increased to $4,400. This further reduced the net cost of her gift to $5,600.
About the Author
Laura is the Principal at Ascend Financial Planning, LLC. She is a fee-only Certified Financial Planner™ professional.
*It would not be advisable to donate securities purchased less than 12 months ago as your charitable income tax deduction would be limited to your cost basis, or original purchase price.
Note: the impact of this approach is larger for higher tax and capital gains rates. The Pease limitation to itemized deductions may reduce the overall value of deductions for adjusted gross incomes of $300,000 if married filing jointly, $250,000 for a single taxpayer.