By George M. Hiller, JD, LLM, MBA, CFP®
You can touch lives for eternity and save extra tax dollars by making charitable gifts of appreciated stock or other appreciated property to deserving ministries. How does this work?
The tax law allows you to take a charitable deduction for the fair market value of gifts to qualified charitable organizations subject to certain limitations and requirements. Such gifts may be in the form of either cash or other property.
Suppose you want to make a gift of $10,000 to a qualified charitable organization. Assuming a combined federal and state income tax rate of 32%, the charitable gift of $10,000 saves you $3,200 in income taxes.
One way to make this gift is to write out a check for $10,000. Another way is to gift stock worth $10,000. Either way entitles you to a charitable deduction of $10,000 on your tax return and an income tax savings of $3,200. So which way is better?
In many cases you may be better off giving appreciated stock, real estate or other property instead of cash. Here’s why. In general, when you give appreciated stock to qualified charitable organizations you not only get an income tax deduction, but you also avoid recognition and taxation of capital gain on the property you gift.
For example, assume you bought stock in a company years ago for $1,000 and that the stock is now worth $10,000. If you sold the stock you would recognize $9,000 in capital gains on which you would have to pay income taxes estimated at $2,250 ($9,000 long term capital gain x 25% federal and state combined tax rate). After taxes you would net out $7,750.
Assume instead that you gift the stock directly to a qualified charity. You recognize no capital gains, pay no taxes, and you get a full deduction for the fair market value of the gift, $10,000. In this example, you save $3,200 in income taxes plus another $2,250 in capital gain taxes. The total tax savings on the gift of appreciated stock equals $5,450.
Appreciated real estate is another example of how you can gift appreciated property to a charitable organization and get a charitable deduction and also avoid recognition of capital gains tax. For example, assume you owned real estate worth $100,000 that you bought years ago for $10,000. If you sold the real estate you would recognize $90,000 in capital gains on which you would have to pay taxes estimated at $22,500. By gifting the real estate to a qualified charity you avoid the capital gains tax and you also get a charitable deduction of $100,000 worth $32,000 in tax savings. In this example, the total tax savings on the gift of appreciated real estate equals $54,500.
One rule to keep in mind is that the tax deduction for gifts of appreciated stock or real estate to charity is limited to 30% of adjusted gross income instead of the 50% of adjusted gross income limitation applicable to cash gifts. If you exceed the limits you may carry over the excess for five years. Another important rule to keep in mind is that you must have owned the appreciated property for at least 12 months in order to be able to deduct the full fair market value of your gift to charity. There are other tax rules that may affect your particular facts so it is often advisable to consult a tax expert.
Gifts to worthy ministries of appreciated stock, real estate or other property reflects wise stewardship in charitable giving. Now may be a good time to consider making gifts of appreciated property to qualified charitable organizations.