Laura H. Yalanis, CPA, MST in the Global Tax Blog
Charitable contributions are a great way to benefit those in need with the added perk of a tax deduction. But what is the best way to give? Cash or appreciated stock?
A refresher on charitable contribution deductions
As we point out in a past blog, a common tax saving method, especially at year-end, is donating to charity. A donation to a qualified charitable organization can be deducted on schedule A of your federal income tax return as an itemized deduction. Donations can be made in the form of cash, property or appreciated shares of stock.
Cash vs. stock donations
Generally, it is much more beneficial to donate appreciated securities rather than cash.
Why? You are able to avoid the capital gain on the donation and still get a deduction for the Fair Market Value (FMV) of the stock.
Should I donate shares with a high or low basis? This works best if you are donating shares that have the lowest basis. If you have a very low basis stock position that you still want to maintain in your portfolio, you can donate that low basis block of shares and buy the same number of shares currently. Because there is a gain, the wash sale rules do not apply, so you don’t have to wait 30 days to re-purchase.
Then, you still have the same value in your portfolio, but you’ve essentially given yourself a “step-up” in basis, without having to recognize a gain!
Is it ever more beneficial to donate cash? The only time it might be less beneficial to donate appreciated stock is if your income is very low. The deduction for donations of appreciated stock to public charities is limited to 30% of your AGI whereas cash donations are subject to a 50% of AGI limitation. Any amount over the 30% threshold would be a carryover for up to 5 years. So, the full deduction may take several years to complete.
You own shares of stock that you bought for $7,000 over a year ago, and today, the shares are worth $14,000. You figure it’s the perfect opportunity to donate this to a charitable foundation. If you decided to sell the stock rather than donate it, you would end up paying capital gains tax on the $7,000 gain. If you’re in the highest tax bracket, the federal tax on the gains would be $7,000*23.8%=$1,666. Depending on what State you live in, there may be additional state taxes. Thus selling the stock and donating the cash would end up costing you $15,666.
However, if you donate the shares, you do not have to recognize the gain (thus, you can give the $14,000 without paying the $1,666). Also, charities are able to sell the shares at their current market value without having to pay the capital gains tax.
Though it may be tempting to simply write a check to a charitable organization, giving appreciated stock is a much more effective donation method in terms of tax savings! Contact any member of our Tax Services Team for more guidance.
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