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Consider Donating Appreciated Stock & Mutual Funds

One way to reduce your tax bill this year is to donate appreciated stock to a charity of your choice versus making a cash donation. While this will be a tough challenge in today's market, it is still one of the best tax planning strategies available to you. This part of the tax code provides a tax benefit in two ways:

1. Higher deduction. Your charitable gift deduction is the higher fair market value of the appreciated stock on the date of your donation and not what you originally paid for it.

2. No capital gains tax. You do not have to pay tax on the profits you made after selling the stock. As long as you have owned the investment for more than one year, you can avoid paying long-term capital gains tax on the increased value of your stock.

A Sweet Example

Winnie and Christopher each own 100 shares of Honey, Inc. that they purchased three years ago for $1,000. Today the stock is worth $5,000 (after taking a bit of a sticky hit in the down market). Winnie sells the stock and donates the proceeds to “Save the Bees” while Christopher donates his stock directly to “Honey Overeaters: Finding a Cure”. Assuming a 15% long-term capital gains tax rate*, a 25% income tax bracket, and no other limitations:

Not only does Christopher see $750 in additional federal tax benefit by donating his appreciated stock, but Honey Overeaters has $600 in additional funds to use for their charitable program.

Other benefits

  • The Alternative Minimum Tax (AMT) does not impact charitable deductions as it does with other deductions.

  • Remember, this approach also provides more funds to your selected charity. By donating cash or check, those additional funds are instead paid as federal taxes.

  • This tax benefit could be worth even more if our honey lovers have more income. The maximum long-term capital gain tax rate can be as high as 20%, and also be hit by a potential 3.8% net investment income tax.

  • This benefit is for everyone who itemizes deductions that have qualified assets, not just the wealthy.

Things to consider

  • Remember this benefit only applies to qualified investments (typically stocks and mutual funds) held longer than one year.

  • Be careful as investments such as collectibles and inventory do not qualify.

  • Consider this a replacement for contributions you would normally make to qualified organizations.

  • Talk to your target charitable organization. They often have a preferred broker that can help receive the donation in a qualified manner.

  • Contribution limits as a percent of adjusted gross income may apply. Excess contributions can often be carried forward as deductions for up to five years.

  • How you conduct the transaction is very important. It must be clear to the IRS that the investment was donated directly to the charitable organization.

If you think this opportunity is right for you, please contact a trusted advisor to ensure you handle the donation correctly.

* The total tax rate on this type of investment can be as high as 23.8% (20% capital gains tax plus 3.8% net investment income tax) if you have qualified investment income above applicable threshold amounts.

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