Author: Beth Bureau, M.S.
One question we are always asked by our clients is how to save on taxes or if there are any additional tax deductions available. Unfortunately, there is no one-size fits all answer to this question as many credits phase-out for high earning individuals.
Making contributions of appreciated stock is a great way to receive a tax benefit for supporting causes that are important to you. The good news? Anyone who holds appreciated stock and itemizes his or her deductions is eligible.
1) The Basics
You are likely already familiar with traditional cash contributions to a 501(c)(3). This is where you pay the organization directly by check or credit card. Cash contributions are a simple way to donate and are currently deductible up to 60% of Adjusted Gross Income (AGI) for taxpayers who itemize their deductions.
However, donating stock that has appreciated for more than one year can provide an even greater tax benefit than cash. You should avoid donating stock owned less than one year, stocks that have incurred losses or privately held stocks.
When making these types of donations, you receive a deduction for the fair market value (FMV) of the stock. You also do not pay capital gains tax on the shares contributed, which means you may contribute up to 20% more than if you made a traditional cash donation. This is because the maximum tax rate on long-term capital gains is 20%.
Many clients shy away from donating stocks because they perceive it to be time consuming or difficult for the organization to accept. While any stock transfers must be completed by December 31st (i.e. received by the charity), they are not difficult to execute. Your financial advisor should be able to assist you with identifying stocks and initiating the contribution. They can also provide the cost basis information to us, which is reported on your individual income tax return. In addition, the charity should provide a written acknowledgement letter that includes the date of contribution, description of the stock and confirmation that no goods or services were received in exchange for the donation.
Contributions of publicly traded stocks, bonds, or mutual funds held more than a year are deductible at their FMV up to 30% of adjusted gross income, whereas cash contributions are deductible up to 60% of your AGI. When combining different classes of contributions in the same year (i.e. cash and appreciated stock), the Internal Revenue Service has a set of ordering rules that must be used to determine the maximum contribution limit for each type. Excess contributions in any of these buckets get carried forward for up to five years.
Building a gifting strategy that maximizes both cash and appreciated stock contributions is a great way to fulfil your philanthropic goals while receiving an additional tax benefit. Please contact a Origin CPA Group advisor if you would like to talk more about charitable contribution strategies. We can assist with building a customized strategy to meet your financial needs and objectives.
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