(MoneyWatch) Over 200 stocks closed at or above their all time high price at the end of trading last week, according to Barchart.com.
With all three major markets up big so far this year, with gains of 26.7 percent for the S&P 500 index, 22.8 percent for the DJIA and 32.6 percent for the NASDAQ, investors who own stocks or mutual funds are enjoying another year of big gains.
If you own stocks or mutual funds with large unrealized gains in taxable accounts, there is a valuable tax strategy to consider. If you are planning to make a substantial donation to a qualified charitable organization, church, synagogue, or other non-profit organization, then consider donating appreciated shares in kind, instead of giving cash.
A few days ago I wrote about some year-end tax planning moves folks should consider now, and this is one of the moves I mentioned.
A donation to a qualified charitable organization may be deducted on Schedule A of 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 realize the gain on the donated property. This results in two tax benefits: A charitable deduction AND avoiding tax on the unrealized capital gain of the donated property.
For example, let's say you plan to donate $10,000 to a charitable organization. You also own shares of stock or a mutual fund that you bought for $5,000 over a year ago, and today it is worth $10,000. If you sold the $10,000 stock instead of donating it, you would pay capital gains tax on the $5,000 gain in value. For folks with higher incomes, the tax rate for long-term capital gains is 23.8 percent, so let's assume the tax on the gains would be $1,190. So selling the stock and giving the cash would actually cost you $11,190.
Instead, if you donated the shares, you would not realize the gain. The tax savings for donating rather than selling the stock would be $1,190 (5,000 x 23.8 percent).
Of course you can claim a deduction of the market value of the donated shares -- the full $10,000 -- as a charitable donation deduction. If you are in the 39.6 percent federal income tax bracket, this could generate another $3,960 (10,000 x 39.6 percent) in tax savings. This brings your total tax savings to $5,150. 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 $5,150 in tax benefits for a donation of property with a current value of $10,000 that originally cost you only $5,000.
So as you can see, your tax benefits from making a donation of appreciated stock versus giving cash can be substantial. And the charitable organization will be just as happy to receive the stock.
But be careful here. This tax treatment is not permitted for shares of stock or a mutual fund that you have owned 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.