As we approach the end of the calendar year, you may find in your mailbox, e-mail inbox, or on the phone an increasing number of solicitations for charitable donations. We are fortunate to work with many charitably inclined individuals who give generously to non-profit entities each year. To maximize the benefit of charitable giving, you should consider the gift of appreciated securities this year, in lieu of cash.
Strange as it may seem to some, most non-profit entities – including your church, synagogue, or favorite charity – probably have an established brokerage account at one of the local firms, ready to accept gifts of stock. Appreciated stock gifted to such a charity is received as its full market value, and sold without any tax consequences to the charity. Thus, it has the same gifting power as cash, but can provide an added benefit to you, the contributor.
Appreciated stock and other securities held for more than 12 months in your personal investment account have long-term capital gains. If sold by you, personally, within this account Uncle Sam would tax most of you at a rate of 15%.1 If gifted to a charitable organization and then sold, the tax would be 0% to you and 0% to the charity.
Let’s say you purchased 100 shares of XYZ stock 13 months ago at a cost of $10/share. XYZ is selling today at $20/share. Thus, you have made a $10/share profit on each share = $1,000. So your holdings of XYZ are worth $2,000 and your gain in the stock is $1,000. Assuming a 15% capital gains tax, you would owe $150 in taxes on the sale of this security. Hence your net proceeds after-tax would be only $1,850.
Conversely, if you gifted the same 100 shares of XYZ stock to your favorite charity, the charitable organization would receive a gift worth $2,000 and you would incur no tax bill whatsoever. And, assuming that you itemize your deductions on your tax return, the entire $2,000 would be eligible for a charitable tax deduction. So, if you pay taxes in the 25% income tax bracket, you could save $500 in taxes for making such a gift.
Note that the same charitable tax deduction would apply to a gift made in cash, but using the example above, if you have to sell a stock to raise the cash for the gift, your net benefit would be $150 less due to capital gain taxes paid.
If you are interested in gifting appreciated securities in lieu of cash this year, you should contact your financial advisor and the charitable organization to obtain the necessary account information and transfer instructions to perform this transaction. Please allow sufficient time for the requisite paperwork to be processed. Starting the process now will help to ensure a seamless transaction.
1 For 2010, those in the 25% income tax bracket and above pay 15% long-term capital gains.
Deborah Graver is the President and Chief Operating Officer at Fragasso Financial Advisors, a Pittsburgh-based investment and financial planning firm. Due to industry regulations, comments are not permitted on this blog. If you would like to contact the author, please email us at blog@fragassoadvisors.com. Deborah can also be reached for comment at 412-227-3200.