Here's A Charitable Deduction That Grows
By Teresa Ambord
Everyone knows that you can give a contribution to a qualified charity and score a tax deduction. But if you own appreciated stock there’s a way you can make that tax break even bigger.
Here’s how it works:
Let’s say you want to donate $1,000 to a favorite qualified charity, and to raise the funds, you sell some stock. You bought the stock a few years ago for $200, and it is now worth $1,000. Of course you get to deduct the $1,000 contribution (assuming you haven’t exceeded contribution limits). But there’s another matter. You have a long-term capital gain from the sell of appreciated stock, so there will be some taxes to pay (15 percent on the gain) that will make the tax deduction from the contribution much less attractive.
Or… you can simply donate the appreciated stock worth $1,000. What’s the difference? As long as you owned the stock for more than one year, you can still take the tax deduction of $1,000 and… since you didn’t sell the stock yourself, you will owe no capital gain tax. The charity receives a contribution of $1,000 worth of stock which it can sell without tax consequence, since it is tax-exempt.
Here are the steps to take if you are interested in making a gift of stock:
First, determine how long you’ve held the stock. If you’ve owned it for one year or more, it falls into the long-term category. This is critical. One year or less is short-term. You can still contribute stocks you’ve held for the short-term, but your tax deduction is limited to the cost of the stock, not the fair market value. There’s no huge tax planning benefit.
Find out the fair market value of the stock on the date you are going to donate. Not that you have to sell the stock… you just have to know the value. The total fair market value is amount you can deduct from your taxable income.
Depending on your income, there may be limitations. This type of donation cannot exceed 30 percent of your adjusted gross income. If it does, you can carry the difference over into future years, but you’ll lose some of the impact. If you’re not sure you’re within the limits, talk to the broker that sold you the stock.
For more information, click on the following IRS link, then move to page 8, Capital Gain Property:
