If you are charitably inclined, making donations is probably one of your key year-end tax planning strategies. But if you typically give cash, you may want to consider another option that provides not just one but two tax benefits — donating long-term appreciated stock.
More tax savings
Appreciated publicly traded stock you have held more than one year is long-term capital gains property. If you donate it to a qualified charity, you can enjoy two benefits: 1) You can claim a charitable deduction equal to the stock’s fair market value, and 2) you can avoid the capital gains tax you would pay if you sold the stock. This will be especially beneficial to taxpayers facing the 3.8 percent net investment income tax (NIIT) or the top 20 percent long-term capital gains rate this year.
For instance, if you donate $10,000 of stock that you paid $3,000 for, your ordinary-income tax rate is 39.6 percent and your long-term capital gains rate is 20 percent. If you sold the stock, you would pay $1,400 in tax on the $7,000 gain. If you also were subject to the 3.8 percent NIIT, you would pay another $266 in NIIT.
By instead donating the stock to charity, you save $5,626 in federal tax ($1,666 in capital gains tax and NIIT plus $3,960 from the $10,000 income tax deduction). If you donated $10,000 in cash, your federal tax savings would be only $3,960.
Beware that donations of long-term capital gains property are subject to tighter deduction limits — 30 percent of your adjusted gross income for gifts to public charities, 20 percent for gifts to non-operating private foundations (compared to 50 percent and 30 percent, respectively, for cash donations).
And do not donate stock that is worth less than your basis. Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to charity.
If you own appreciated stock that you would like to sell, but you are concerned about the tax hit, donating it to charity might be right for you. For more details on this and other strategies to achieve your charitable giving and tax-saving goals, contact us.