Planning to make a contribution to your favorite charity or alma mater and want to maximize your charitable contribution….
Consider donating appreciated stock from your investment portfolio instead of cash. Tax benefits from the donation can be increased and the organization is just as happy to receive the stock.
Where the donated property has appreciated in value the donor benefits by NOT having to recognized a taxable gain on the appreciation. Yet the charity receives the same benefit either way. These rules allow for the “doubling up,” so to speak, of tax benefits: a charitable deduction, PLUS avoiding tax on the appreciation. Both donor and charity maximize the gift.
Example: Tim and Tina are best friends, both attended Binghamton University. Each plans to donate $10,000 to the school. Each also owns $10,000 worth of stock in ABC, Inc. which each acquired for $2,000 several years ago.
Tim sells his stock and donates the $10,000 cash. He gets a $10,000 charitable deduction, but must report his $8,000 capital gain on the stock. His gain is potentially taxable.
Tina donates the stock directly to the school. She gets the same $10,000 charitable deduction and avoids any tax on the capital gain. The school is just as happy to receive the stock, which it can immediately sell for its $10,000 value in any case.
End Result: Tina doubled up and Tim has to report a capital gain that is potentially taxable.
Caution: While this plan works for Tina in the above example, it will not work if the stock has not been held for more than a year. It would be treated as “ordinary income property” for these purposes and the charitable deduction would be limited to the stock’s $2,000 cost.
Other considerations: If the property is other ordinary income property, e.g., inventory, similar limitations apply. Limitations may also apply to donations of long-term capital gain property that is tangible (not stock), and personal (not realty).
Finally, depending on the amounts involved and the rest of your tax picture for the year, taking advantage of these tax benefits may trigger alternative minimum tax concerns.