If you are planning to make a relatively substantial donation this year to a non-profit organization such as a church, synagogue, or other charitable organization, look through your portfolio before you write a check.
Since you will be making a donation to a qualified charitable organization and donations may be deducted on your federal income tax return as an itemized deduction, you should consider donating appreciated stock from your investment portfolio instead of cash. This works best for folks whose marginal tax bracket is 15 percent or higher and who claim itemized deductions.
Given the run-up in the stock market over the past 12 months, many investors who bought individual stocks are very likely to own shares that have substantial unrealized gains. And some of those shares were bought just about 12 months ago.
The tax benefits -- which include deducting the amount of the charitable donation AND escaping the unrealized gains on the donated stock - come from the fact that the deduction for a donation of property to charity is equal to the property's current fair market value. And when the donated property is an investment, the donor does not have to recognize the capital gain. 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 bought stock for $10,000 last May and today it is worth $20,000. You plan to donate the entire amount to a charitable organization.
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. Therefore, 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 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.
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 the stock has NOT been held for more than a year. If the shares were held for a year or less, the shares would be treated as ordinary income property for these purposes, and the charitable deduction would be limited to the stock's COST BASIS (i.e., what you paid for it and not what it's worth now).
So remember that if you are considering the donation of appreciated stock, you need to make sure that the shares have been held for more than one year.