Charitable Gifts of Appreciated Property
A donor who makes a contribution to charity can take an income tax deduction for the value of the gift. The deduction is available only to taxpayers who itemize their deductions. It is not available if the taxpayer takes the standard deduction.
The effect of the charitable deduction is to reduce the donor’s cost of giving $1.00 to charity to 85 cents, or maybe as little as 60 cents, depending on the taxpayer’s income tax bracket. If a taxpayer in the 28% bracket gives $100 to charity, the taxpayer reduces his income tax bill by $28. The “cost” of giving the charity $100 is only $72. A taxpayer in the 39.6% bracket can give $100 to charity for a cost of $60.40.
A gift of appreciated capital gain property, such as marketable securities, gives the donor an additional tax advantage that further reduces a gift’s out-of-pocket cost: There is no income tax on the gift’s appreciation. Gifts of securities and real estate held long-term are deductible at the full present market value, with no tax on the appreciation. The taxpayer gets to deduct the full value of the property and pays no capital gain tax. There are limitations on large deductions. Gifts of long-term capital gain property are deductible up to 30% of adjusted gross income with a five-year carryover of any excess. Alternatively, the gift of the long-term capital gain property can be deductible up to 50% of adjusted gross income with a five-year carryover but only if the deduction is limited to the donor’s cost basis for the property, not its current fair market value.
If a donor wishes to contribute $1,000 to a charity, instead of writing a check for $1,000, he or she should consider transferring shares of stock equal to $1,000. If the donor sold the stock to generate the cash to make the gift, he or she would have to pay capital gain tax on any gain realized on the sale of the stock. The donor would have to sell considerably more than $1,000 of stock to have $1,000 after paying capital gain tax to make the charitable gift. If the stock had a zero cost basis for income tax purposes, the capital gain tax could be as high as $200, leaving only $800 net for the charitable gift. Instead of selling the stock, the donor could transfer the stock to charity, and get an income tax deduction for its $1000 value and pay no capital gain tax. When the charity sells the stock, it pays no capital gain tax either.
Donating securities isn’t just for wealthy people. You can give a small number of shares to your favorite charity every year. Most larger charities, and even many smaller ones, are familiar with the handling of securities donations. If your securities are held in an account, directing transfer is very easy. If you hold the share certificates, you will have to deliver the shares with an executed stock power.
If the donor has investment property that has decreased in value, then the donor should sell the property and donate the proceeds. The donor can take a capital loss for the sale (subject to some restrictions) and use the proceeds for making the contribution that qualifies for the charitable deduction.
These rules apply to all property, not just stock. Appreciated real estate makes an ideal gift to charity. The donor can get a deduction for the fair market value of the real estate and pay no capital gain tax on the appreciation. Any capital asset is a candidate for this type of contribution.
Charitable gifts are 100% deductible for purposes of the gift tax and the estate tax. That means that a gift in any amount to a qualifying charity, during life or at death, results in no transfer tax. If you have bequests to charity in your will, it is wise tax planning to make the gifts to charity before you die. That way, you get an income tax deduction for making the gift, and the value of the gift is not subject to gift or estate tax.
Special rules apply if the taxpayer contributed: (1) Property subject to a debt, (2) A partial interest in property, (3) A future interest in tangible personal property, or (4) Inventory from your business. Be sure to check with a qualified professional before making large donations.