Charitable Donations of Appreciated Stock

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Many presume that a sizeable charitable donation to a favorite cause-oriented organization or university should be in the form of cash. Meanwhile, opting to make that contribution instead as appreciated stock could offer tax benefits that would otherwise be missed, and the organization will be just as appreciative.

The general rule for a donation of property to charity is that the deduction is equal to the fair market value of the donated property. When the property is gain property (FMV is greater than the cost basis), the donor does not have to recognize the gain on the donated property. Not only does the donating party receive a charitable deduction, they also avoid paying any tax on the appreciation.

For illustrative purposes, consider owning $20,000 worth of stock (which has a cost basis of $5,000). If you were to sell the stock and contribute the cash proceeds, you would need to report a $15,000 capital gain on a personal tax return and a $20,000 charitable deduction. If you were to donate the stock instead, you would save approximately $3,500 in taxes from not having to report the capital gain on your tax return. The charitable organization would be able to sell the stock and receive cash should it wish.

It is important to note that a number of rules apply. For example, the above scenario would not work if the stock had not been held for more than a year. The stock would be treated as ordinary income property and the charitable deduction would be limited to $5,000, the cost basis of the property.

Depending on the personal situation, you also need to be aware that the Alternative Minimum Tax could be triggered. Therefore, a complete analysis should be conducted to ensure that this strategy makes sense.

For more information or to discuss specific donation considerations, contact Sandy Smith at [email protected].

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