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Giving the “Right Stock” to Charity

Posted by Nick Wheeler, CPA on Aug 9, 2016 11:23:29 AM

iStock_43285238_LARGE-094030-edited.jpgTax rules may affect your donations

Do you own shares of stock that you want to contribute to charity? Before you pull the trigger on the donation, make sure that you give away the “right kind” of securities instead of the “wrong kind.” It can make a big difference on your tax return.

The conventional wisdom is to donate low-basis stock you’ve held for a long time. That way, you can avoid tax on the stock’s appreciation in value. On the other hand, absent any extenuating factors, you might decide to hold onto high-basis stock you have owned for just a short period of time.

Background: If you donate to charity stock that would have produced a long-term capital gain had you sold it instead of donating it (i.e., you’ve owned the stock for more than one year), you can deduct the full fair market value (FMV) of the stock on the date of the donation. What’s more, the appreciation in value that occurred during the time you held the stock remains untaxed forever. However, if a sale would have resulted in tax at ordinary income rates had it been sold (i.e., you’ve owned it for one year or less), your charitable deduction is limited to the basis in the stock. Thus, you might as well keep it.

Example 1: The ABC Corporation stock you acquired five years ago for $3,000 has a current FMV of $10,000. If you donate the stock to charity, you can deduct the full $10,000. There is no tax due on the $7,000 of appreciation in value. 

Example 2: The XYZ Corporation stock you acquired 10 months ago for $3,000 has a current FMV of $5,000. If you donate the stock to charity, your deduction is limited to $3,000. Because you receive no tax benefit from the $2,000 appreciation in value, you might want to keep the XYZ stock, at least until you have owned it for more than one year. Alternatively, you may sell the stock and donate the proceeds. In that case, you can deduct the full $5,000, but you must report a $2,000 short-term gain.

In summary: If you have a choice between donating low-basis stock held more than one year and high-basis stock held a year or less, the low-basis stock is usually the better choice. Of course, other factors may affect your situation.

What should you do with stock that has declined in value? If you will benefit from a tax loss at the end of the year, you might sell the stock and then donate the proceeds to charity. Otherwise, if you simply donate the stock, your deduction is limited to its FMV.

Note that there are other possible reasons for selling or holding a particular stock. For instance, if you hold low-basis, long-term stock that you think is about to skyrocket in value, you may want to keep it for the time being. Conversely, if you own stock that you think has reached its peak, you might donate it now. Think about your decision before you act.

For more information on individual services, please contact Nick Wheeler, CPA at (334) 887-7022 or please feel free to leave us a message below.  

Topics: Individual Tax

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