Taxpayers with appreciated securities positions may be able to save on federal taxes by donating the actual securities (e.g., stocks) held more than one year (long-term gain securities) to a qualified charity rather than selling the securities and donating the cash proceeds. That’s because a sale of those securities is a taxable transaction that results in less after-tax cash to be donated. In contrast, donations of long-term capital gain property, including securities, are generally deductible at their fair market value (FMV), with no federal taxes due on the transaction. However, donations of appreciated securities held one year or less (short-term gain securities) to a qualified charity are generally limited to basis (cost). Note that if the donated securities have declined in value since being purchased, the deduction is only equal to the FMV.
Charitably inclined taxpayers should note that federal regulations limit an individual taxpayer’s total contributions to a percentage of adjusted gross income (AGI). For cash contributions to public charities, i.e., churches, schools, and hospitals, the limit is generally 50% of AGI. For the charity, a gift of publicly traded securities is very similar to a cash donation because of liquidity. However, differences exist for an individual donor. For an individual donor, the deduction for securities donations is generally limited to 30% of AGI if the donee is a public charity.
Planning is essential in determining when to donate appreciated stock. As noted above, because long-term capital gain property contributions are generally deductible at FMV, a charitable gift of stock before a sale can produce a charitable contribution deduction for the full value of the stock. Also, the income tax liability that would have accompanied a stock sale is avoided. This is generally more beneficial to the donor than selling the stock and gifting the proceeds to the charity.
Example: Gifting appreciated stock versus sales proceeds to charity.
Harry and Sally have pledged an $80,000 charitable gift to their church. They have selected a block of stock currently worth $80,000 from their portfolio to use for the gift, but have not decided whether to gift the stock or sell it and gift the proceeds. The stock was purchased for $50,000 in a single transaction several years ago; however, they believe the stock price has peaked.
Harry and Sally would be better off gifting the stock to charity because they will never be taxed on the $30,000 of appreciation ($80,000 value – $50,000 cost). The net economic benefit to them of donating stock rather than cash is $4,500, the tax (assuming a 15% capital gains tax rate) they would have paid on the $30,000 long-term capital gain.
The preceding example assumes Harry and Sally have sufficient AGI to use the entire $80,000 deduction. However, if they are unable to use the full $80,000 this year, any unused balance will carry over for five years. This may actually be beneficial if they expect to be in a higher tax bracket in future years.