Donating Stock

Donating appreciated stock can result in real tax savings

If you are planning to make a contribution to the Friends of Sabino Canyon, you should consider donating appreciated stock from your investment portfolio instead of cash. Your tax benefits from the donation can be increased and the organization will be just as happy to receive the stock.

This tax planning tool is derived from the general IRS rule that the deduction for a donation of property to charity is equal to the fair market value of the donated property. Where the donated property is “gain” property, the donor does not have to recognize the gain on the donated property. These rules create a “double play” of tax benefits: a charitable deduction(1) AND avoiding tax(2) on the capital gains of the donated property.

Let’s look at an example: Tom and Jerry are brothers, and each wants to make a charitable contribution to his favorite charity. Tom wants to donate to his college alma mater, while Jerry wants to give to the Friends of Sabino Canyon. Both Tom and Jerry purchased shares in XYZ Corp. back in April 1996 for $5,000 each. Tom and Jerry’s investments now have a fair market value of $20,000 each.

In order to make his charitable contribution, Tom decides to sell his shares in XYZ Corp. Tom realizes a gain of $15,000 on those shares. Tom now has to deal with Uncle Sam, and will be required to fork over $3,000 in federal taxes on this $15,000 gain (at a 20% capital gains rate). Tom then takes these funds in the amount of $17,000 ($20,000 – $3,000) and writes a check to his alma mater for this amount. Assuming that he is in the 28% tax bracket, Tom will realize a tax savings of $4,760 (28% of $17,000) on the charitable contribution deduction.

Jerry, on the other hand, has made arrangements with the Friends of Sabino Canyon to donate his shares of XYZ Corp. directly to the Friends of Sabino Canyon. After the transfer, Jerry will NOT have to realize any gain or pay any tax on the $20,000 transfer of the stock to the Friends of Sabino Canyon. Jerry will also receive a charitable contribution deduction for the full $20,000 fair market value of the stock. Assuming that Jerry is also in the 28% tax bracket, the charitable contribution deduction will generate tax savings of $5,600 (28% of $20,000) for Jerry.

Take a closer look at the numbers: Who “made out” better in these transactions? In Jerry’s case, the Friends of Sabino Canyon received the full $20,000 with which to carry out its mission, but Tom’s charity received only $17,000… almost 18% less. Also, Jerry saved a full $5,600 in taxes on his charitable contribution, while Tom only saved $1,760 ($4,760 tax deduction on his charitable contribution less $3,000 paid in taxes), a whopping difference of $3,840 in tax savings for Jerry.

On Tom’s transaction, the IRS made out. In Jerry’s transaction, both Jerry AND the Friends of Sabino Canyon made out. Tax policy is often used to drive social action and this is a prime example. There was nothing illegal or immoral for Jerry to arrange his affairs in order to comply with the law and keep his taxes a low as possible while providing his charity with the largest possible contribution.

But there ARE a few cautions: While this plan works for Jerry in the above example, it will not work if the stock has NOT been held for more than a year. If the shares were held for a year or less, the shares would be treated as “ordinary income property” for these purposes, and the charitable deduction would be limited to the stock’s $5,000 cost. So remember that if you are considering the contribution of appreciated stock, you need to make sure that the shares have been held for more than one year and qualify for the “qualified appreciated stock” deduction.

There ARE very real tax benefits to the tax savvy charitable giver. Don’t overlook them.

This information is not intended to provide tax or legal advice. Please consult the IRS or your tax adviser for information specific to your financial situation.