Due to the general success of the stock market in recent times, many people are currently carrying appreciated stock as part of their balance sheet. Individuals who are charitably inclined and looking to make donations to a tax-exempt organization should consider using this appreciated stock from their portfolios instead of cash, as the tax savings can be quite beneficial. If the stock has been held for more than one year, and has appreciated in value, it is especially preferable for the donor to donate the stock.
Under the new tax laws in 2018, the donor of appreciated stock held for more than one year is entitled to an income tax charitable deduction equal to the stock’s fair market value on the date of the donation, up to 30 percent of the donor’s adjusted gross income. If the stock has been held for less than one year, the income tax deduction is equal to the fair market value of the stock at the time of the donation, but reduced by the amount of the ordinary income that would have resulted had the contributed stock been sold. Essentially, the amount of the deduction is usually the donor’s income tax basis in the stock.
For the donor to realize the income tax deduction, he or she needs to itemize deductions, and not take the standard deduction, and so the charitable deduction (along with other deductions) would need to be greater than the $12,000 standard deduction for single persons or $24,000 for married taxpayers filing jointly. Importantly, the donor can carry forward any unused deductions (such as if they exceed the 30 percent limit) for up to five years from the date of the donation.
For comparison to the above, donations of cash can generally be deducted up to 60 percent of adjusted gross income, but there are added benefits to donating appreciated stock. Namely, there is no capital gains tax recognized on a gift of appreciated property to charity, and so the inherent tax held in the asset that the donor would normally pay on a sale of the stock is no longer applicable. This allows for a greater gift to the charity, as the charity can then sell the stock for full value without recognition of capital gains tax.
If stock has depreciated in value since the donor acquired it, the preferred action would be to first sell the stock and recognize the capital loss (perhaps to offset current or future capital gains), and then donate the cash to the charity. This presents the most beneficial tax result. Using publicly held stock for donation is generally preferred to closely held stock, as often the donee charity cannot, or will not, be able to accept and then maintain the closely held stock.
In addition to the income tax charitable deduction, the donor would also be eligible for a gift tax charitable deduction, which operates like a tax exclusion, and could be used to offset non-charitable gifts made by the donor. There is no percentage limitation on the amount of the exclusion that can apply, as there is for the income tax charitable deduction.
Due to the potential additional tax savings, individuals looking to make charitable donations should strongly consider gifting appreciated stock instead of cash.