Donating appreciated stock can double tax benefits

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(MoneyWatch) With the market, as measured by the S&P 500 index, up about 12 percent so far this year, investors are finding they may have big gains in some stocks. Apple is up over 48 percent this year. If you are planning to make a substantial donation to a qualified charitable organization, church, synagogue, or other non-profit organization, then consider using appreciated shares of stocks or mutual funds instead of cash.

A donation to a qualified charitable organization may be deducted on your federal income tax return as an itemized deduction. The tax planning benefits of donating appreciated shares of stock or a fund include deducting the amount of the charitable donation AND avoiding the unrealized gains on the appreciated shares. This is because of the general rule that the deduction for property donated to charity is equal to the fair market value of the donated property. Where the donated property is "capital gain" property, the donor does not recognize the gain on the donated property. These rules create a "double play" of tax benefits: A charitable deduction AND avoiding tax on the unrealized capital gains of the donated property.

For example, let's say you plan to donate $20,000 to a charitable organization. You also own shares of stock or a mutual fund that you bought for $10,000 last April and today it is worth $20,000. If you sold the $20,000 stock instead of donating it, you would pay capital gains tax on the $10,000 gain in value. The tax rate for long-term capital gains is 15 percent. Instead, if you donated the shares, you would not realize the gain. The tax savings for donating rather than selling the stock would be $1,500 (10,000 x 15%).

In addition, you can claim a deduction of the market value of the donated shares - the full $20,000 - as a charitable donation deduction. If you are in the 25 percent federal income tax bracket, this could generate another $5,000 (20,000 x 25%) in tax savings. This brings your total tax savings to $6,500. If you are in a higher tax bracket, your donation deduction will be even more. Also consider this: You are giving a gift that is two times what it originally cost you. To sum it up, you are getting about $6,500 in tax benefits for a donation of property with a current value of $20,000 that originally cost you only $10,000.

So as you can see, your tax benefits from making a donation of appreciated stock versus giving cash can be substantial. And the organization will be just as happy to receive the stock versus cash.

But be careful here. This will not work if you have owned the shares of stock or a mutual fund for less than one year. If the shares were held for a year or less, the shares would be treated as ordinary income property, and the charitable deduction would be limited to the COST BASIS of the shares.

So remember that if you are considering the donation of appreciated stock, make sure that the shares have been held for more than one year.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.

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