It’s important to help the less fortunate in our community. Making cash donations to local charities is a great way to support their good works. And of course, cash gifts are fully tax deductible. But giving stock (or bonds, land, or other investment assets) that has gone up in value can provide you, or your client, with an even bigger tax savings–which may allow either of you to make a larger gift than you thought you could make.
* Smart tax move 1. If you have owned stock for more than a year, you get a charitable deduction equal to the current value of the stock. Big tax plus: You avoid paying tax on the gain in value. So the cost of the charitable gift equals the stock’s original cost to you, but the deduction equals its present value.
You get a tax deduction for appreciation in value on which you pay no tax. In fact, no tax is ever paid on the appreciation. The charity, a tax-exempt organization, owes no tax when it sells the stock.
Example: Two years ago, your client bought stock for $500. Its value is now $750. The client wants to make a $750 donation to ABC Charity. He or she gives the stock instead of the cash. The client gets a $750 deduction for a cost of only $500. Assuming they’re in the 28 percent federal income tax bracket, they’ll also save around $70 in federal income taxes. (You may also save state and local income taxes.) Plus, he or she won’t have to pay capital gains tax on the stock’s $250 appreciation in value. Your advice has just saved your client lots of money and provided a great organization with some needed assets.
Note that this generous tax rule applies only to appreciated property held for more than a year (what the tax law calls “long-term capital gain property”). If the same property were owned for a year or less at the time you make the charitable contribution, your deduction is limited to the property’s cost to your client. In the example, your client’s deduction for the $750 stock gift would be only $500 if the stock were not bought before the contribution.
* Smart tax move 2. The obvious move is to hold on to short-term property until it’s owned for more than a year–and then make the contribution. If it’s not feasible to wait, you should sell the property and donate the net proceeds (after income tax and commissions). Your deduction is bigger that way. The reason? The net proceeds are greater than the stock’s original cost.
On the other side of the coin, let’s say you’re considering making a gift of stocks that have gone down in value since you purchased them. If that ‘s the case, you should know…
* Smart tax move 3. Don’t donate stock that has gone down in value. Sell the stock first and then donate the net proceeds. That way, you get two tax deductions. You can claim (1) a capital loss deduction for the decrease in the value of the stock, and (2) a charitable deduction for the gift proceeds. If you give the stock outright, you could only claim a charitable deduction for the value of the stock at the time of the gift. You would forfeit any deduction for the stock’s drop in value.
Example: You bought 100 shares of ABC stock two years ago at $50 per share, and it’s now worth only $30 per share. You don’t expect the value to go up any time soon. If you donate the stock, you can claim a $3,000 charitable deduction ($30 times 100 shares). But by selling the stock and contributing the proceeds (after commissions), you can still claim the $3,000 charitable deduction. Tax bonus: You can also claim a $2,000 capital loss deduction ($20 loss per share times 100 shares). The added tax savings from the capital loss deduction more than make up for the sales commission.
Note: The capital loss deduction is limited to $3,000 a year. To the extent capital losses exceed capital gains, they are currently deductible against only $3,000 of taxable income. Any amount over $3,000 is carried over and deducted in the following years.
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