Do you want to give a large gift to your favorite charity without hurting your cash flow? You do not necessarily have to donate money. For instance, if you hold shares of stock that have appreciated in value, you may decide to give the securities to a nonprofit organization. With some astute tax planning, you can maximize the available deduction by donating the “right stuff.”
Generally, you may give away appreciated stock with a low tax basis and keep other stock with a high tax basis. It all depends on the tricky tax rules for charitable gifts of property.
For starters, if you donate appreciated stock that would have produced a long-term capital gain if you had sold it (i.e., you have owned the stock for more than one year), you can deduct the full fair market value (FMV) of the stock on the date of the contribution. The appreciation in value that occurred while you were holding the stock remains untaxed—forever.
However, if the stock gain would have been taxed at ordinary income rates had it been sold, your charitable deduction is limited to your basis in the stock. Thus, there is no special tax benefit for giving away these securities.
Example 1: You acquired stock five years ago for $2,000 that is now worth $10,000. If you donate the stock to charity, you can deduct an amount equal to the FMV, or $10,000. There is no tax due on the $8,000 of appreciation.
Example 2: You acquired stock six months ago for $2,500 that is now worth $4,000. If you donate the stock to charity, you can only deduct an amount equal to the basis, or $2,500. Thus, you get no benefit from the $1,500 appreciation in value. However, if you sell the stock instead and donate the proceeds, you can deduct the full $4,000.
If you have a choice between donating low-basis stock held more than one year and high-basis stock, it makes sense to donate the low-basis stock, absent any extenuating circumstances. Note that the tax advantages of donating low-basis stock will be accentuated if tax rates increase next year as expected.
What happens if you own stock that has depreciated in value? Assuming you will benefit from a tax loss, you might decide to sell the stock and then donate the proceeds to charity. Otherwise, your deduction is limited to the FMV of the stock.
Of course, there may be other economic reasons for keeping certain shares of stock and donating others. For example, you may want to hold onto a stock you believe is poised to shoot up in value or rebound from a declining trend. Similarly, you might keep good dividend-paying stocks in your portfolio.
Practical advice: Weigh all the relevant factors, including taxes, before you donate stock to charity. And stay on top of the latest tax developments.