Investors who own stocks or mutual funds have enjoyed another year of solid gains in 2016. Even with the year’s end just days away now, it’s not too late to consider donating shares of stocks to your favorite charity.
And the coming Trump administration means you should consider making an even larger charitable donations this year.
If you’re planning to make a substantial donation to a qualified charitable organization, such as a church, synagogue or other nonprofit group, consider donating shares of stock (or a mutual fund) that have appreciated during 2016’s run-up, instead of writing a check or giving cash.
Giving cash, writing a check or charging a donation on a credit card is fine if your donation is a few hundred dollars or less. But if you can give a thousand dollars or more, the tax benefits of donating appreciated securities can really reduce the aftertax cost of your gift.
That’s because when you donate shares of an investment that has appreciated, you not only get to deduct the value of those shares as a charitable donation but you also avoid ever reporting the shares’ gains as taxable income.
A double tax benefit results because the general rule is that the deduction for property donated to charity is equal to its fair market value. And when the donated property has a capital gain, the donor doesn’t realize that gain. The second benefit is forever avoiding paying tax on the donated property’s capital gains.
Let’s say you plan to donate $10,000 to a charitable organization. You also own shares of stock or a mutual fund that you bought a while ago for $5,000 that are now worth $10,000. Let’s assume your federal marginal tax rate is 35 percent and the tax rate for long-term capital gains for you is 23.8 percent.
If you just gave $10,000 in cash, you would claim the $10,000 as a charitable donation on Schedule A. That deduction would reduce your federal taxes by $3,500. So the aftertax cost of your $10,000 donation is $6,500.
Instead, let’s say you donated the shares of the mutual fund you bought a while ago, whose current value is $10,000. Of course, you can claim a deduction of the market value of the donated shares -- the full $10,000 -- as a charitable donation. That will also reduce your federal income tax bill by $3,500.
But remember, you paid only $5,000 for those shares. If you had held them and sold them, you would pay $2,380 in capital gains taxes. But because you donated these shares, you’ll never pay the capital gains taxes. That’s an additional tax savings of $2,380. So the aftertax cost of donating shares worth $10,000 in this example is only $4,120.
You could even take this a step further. Since you paid only $5,000 for the donated shares, and your federal tax savings for the deduction is $3,500 (forgetting the taxes on the gains), then the aftertax cost of the $10,000 donation of appreciated shares is as low as $1,500.
This is why your tax benefits from a donation of appreciated stock versus giving cash can be substantial. Most charitable organizations are just as grateful to receive the stock -- and even have their own brokerage accounts ready to receive your transfer of shares.
But be careful here. These tax benefits are allowed only for shares of stock or a mutual fund that have appreciated since you originally bought them and you’ve owned for over one year (also known as long-term capital gain property). Shares held for a year or less would be treated as ordinary income, and the charitable deduction would be limited to the cost basis (or what you paid) for the shares.
Finally, if the shares are now worth less than what you’ve paid for them, don’t donate them. You can claim only the current value as the deduction and not the higher cost you paid to buy the shares.