Giving to charity is an important financial priority for many people. Most often this takes the form of donating cash or material goods to a favorite nonprofit. A less common strategy—but one that may be worth considering—is to give the gift of appreciated stock. When managed correctly, donating appreciated stock can be beneficial for the charity and the donor, allowing the donor to make a larger gift while potentially claiming a higher tax deduction.
How it works
Generally speaking, a contribution to a qualified charity allows you to claim a tax deduction if you itemize deductions. (See IRS Publication 526, Charitable Contributions for additional information.) When a stock has increased in value over time and you intend to make a donation with the proceeds, you can approach it in two ways as illustrated by this example:
A married couple holds a stock valued at $10,000. The stock was purchased five years earlier for $5,000. The couple would like to liquidate the stock as a way to make a substantial gift to a local charity. They can either:
1. Sell the stock, generating $10,000 in proceeds and then make the gift. Assuming that they owe long-term capital gains taxes at a rate of 15 percent1 on the $5,000 long-term capital gain, their net proceeds would be $4,250. (This does not assume any state taxes.) In this case, the total after-tax proceeds available for the charity would be $9,250. This is also the maximum value of the tax deduction they could claim (the actual deduction available will depend on their income level).
2. Give the shares of stock directly to the charity. By not selling the stock first, the couple would not have to recognize tax on the gain. Ownership would be transferred to the charity, which would generally be able to sell the stock at any time. Neither the couple nor the charity would be required to pay tax on the appreciated value when the sale occurs. The charity would receive a larger donation because the stock would be valued at $10,000. The couple would be able to claim up to a $10,000 tax deduction2 based on the fair market value of the stock on the day the gift is made (based on the average of the high and low selling price of the security on the date of transfer). Keep in mind that the stock can move in value, and future gains for the charity after you gift the stock are not guaranteed.
If you have appreciated assets that might be appropriate to donate to charity, here are other factors to consider:
• The stock must be held for more than one year to qualify as capital gain property for the scenarios listed above.
• The maximum amount you can deduct in a given year is limited to 30 percent of your adjusted gross income (known as AGI, or your total gross income minus specific deductions), because it is appreciated capital gain property3. However, you can carry forward unused deductions for five years. You do have an option of deducting only the cost basis (purchase price adjusted for stock splits, dividends and return of capital distributions) of the security, which would raise your deductible limit to 50 percent of your AGI.
• The total deductions you can claim in a year may be reduced if your income exceeds certain levels.
• Consult with your tax advisor to make sure your gift is handled properly in order to claim your tax deduction. Additionally, talk to your financial professional to see how you can make donations that are aligned with your financial goals.
1 Assumes ordinary tax bracket of between 25-35 percent.
2 Deductions for charitable contributions may be limited based on the type of property donated, type of charity and the donor’s AGI.
3 Other limitations to the amount you can deduct in a given year may apply.
William “Drew” Watson CFP® is a Financial Advisor and Private Wealth Advisor with Ameriprise Financial Services, Inc. in Owensboro, KY. He specializes in fee-based financial planning and asset management strategies and has been in practice for more than 20 years. To contact us by phone, please call 270-684-8424, or mail to 111 West 3rd St., Owensboro, KY 42303. You may also visit our website at www.williamawatson.com.