Donating Appreciated Stock

He donated long term appreciated property to a recognized charity.

He does not regognize income on the gain, and he is allowed to deduct the Fair Market Value of the donation on date of gift.

Since receiving gifts is well within the allowed nontaxable income of the Salvation Army, and I will assume he has a proper receipt for the gifts, he gets to deduct the FMV, and the charity does not recognize taxable income. If he cannot use it all this year because it exceeds 30% of his AGI, he has a carryover available to him.

One year, I donated stock which had tripled in value. Say from $1,000 to $3,000. I was into AMT territory and the long term gain would have been

22.5% So, by donating the stock, I saved $450 in addition to the tax savings from a $3000 cash donation. For those who are charitable, this is a neat trick to use on an ongoing basis. Donate stock instead of cash and if it was shares you'd want in your portfolio, just replace it. You just bumped up your basis for free.

No, there's a special exception for donating appreciated, long-term securities. Your tax deduction is the FMV, not the cost basis.

So? If you had to pay that tax, you would have had less to contribute to them, so they end up with the same net.

They also may be tax-exempt.

I haven't paid much capital gains tax in years, I do all my large charitable contributions by donating appreciated mutual fund shares to my Fidelity Charitable Gift Fund account (if you're transfering funds from another Fidelity account, you can do the entire thing online). When I want to get out of a position, I do it by donating them; if I just want to make a contribution, I immediately replace the shares I transferred. So in two transactions I've effectively donated cash and wiped away years of capital gains.

The only time I think I've sold shares for a normal gain was a few years ago when I had a large capital loss carryover. Since there's not much benefit to dying with carryover held over, I made use of it to absorb gains while rebalancing and consolidating my portfolio.

Right.

Of course they're exempt. The Salvation Army is a church.

People donate appreciated stock to our church all the time. We sell it immediately, and don't pay any tax.

Regards, John Levine, snipped-for-privacy@iecc.com, Primary Perpetrator of "The Internet for Dummies", Please consider the environment before reading this e-mail.

The wash sale rules don't apply because you don't recognize the gain?

Wash sale only applies when one sells at a loss. You must buy replacement shares +/- 31 days from time of sale at loss.

I can sell to take a gain anytime I like. IRS happy to take my money. In this case, I just get rid of the potential cap gain.

If you're going to buy the stock right back at market value, it makes sense to do that instead of giving the same money to charity directly, then, because of the stepped up basis.

So if you can get a deduction for market value of the stock and increase basis by buying it right back again, you're getting in effect a double deduction. Do I have that right?

Yes, there's a double dip here. You get the tax deduction and you get to 'avoid' the cap gain, which as I point out, can actually have a higher impact than the 15% if one is in AMT territory. As Barry pointed out, using the charitable trust from a broker can help smooth out the transactions.

This would be clearer - for me anyway - if there were a real example. I am not sure I see a double deduction.

Say that a person has gross income of $100K and owns a stock with a holding period under one year that has a $10K cost basis and current market value of $50K. Implied short term capital gains is $40K. Just for argument say the tax rate was 30%. So if you sell this stock you have AGI of $140K and net income after tax of $98K.

Now say you want to donate that appreciated stock to charity instead. Now you have a $50K deductible donation and AGI of $50K. Net income is $35K. But on a cash basis you actually made the $100K gross income and paid tax of $15K, leaving you $85K.

So in the case where you sell the stock and keep the proceeds you have net $98K versus if you donate you are left with $85K. You make more by selling the stock and paying tax on that sale. But if you are charitable and want to give away money, you managed to give away $50K of assets while only affecting your net worth by about $14K. So it was tax-efficient charity, but you did lose money. I make that explicit because some of these posts seem to be implying that you came out ahead on a net asset value basis, and it doesn't look so.

If you invest in the same stock again, that's new money you are investing, and of course it gets a new cost basis. I don't see any double deduction.

Think of it this way. Say you have $10,000 in cash you want to donate to a charity. You also have $10,000 in stock that has a basis of $2,000.

If you donate the money to charity, you get a $10,000 deduction. But when you eventually sell the stock you will pay tax on a capital gain. Let's say it goes up in value to $15,000 when you eventually want to sell it. At that time you'll have a capital gain of $13,000.

Instead say you donate the stock to charity and take the cash you were going to donate and use it to replace the stock. In that case you get a $10,000 deduction when you make the gift. But then when you sell the stock your capital gain is $5,000 instead of $13,000.

As I often do, I confused the issue by referencing that one can buy back at current price. Forget that for now.

I own a stock $10K value $1K basis. I wish to donate $10K to a charity. By donating cash I get a tax benefit that's at my marginal rate, say 28%. But - by donating the stock, I avoid the potential cap gain tax on the $9K of gain. 15% or potentially more. This avoiding the cap gain is the 'extra' benefit gained by donating the stock.

One thing I have not seen mentioned yet, is the deductibility limitations.

Gifts of apreciated property to a 50% organization is limited to 30% of AGI with a carryover to next year available.

So you might have to wait several years before gaining the full tax benefit of this gift. And in some cases, where you might not be able to itemize except that you have a high charitable gift deduction, this limitation might reduce the deduction to below the itemized threshold.

Also if the sppreciated stock has only slight appreciation, you may elect to claim the cost and receive the full 50% deductibility.

To explain a "50% organization" it is one determined by the iRS to meet the requirements of S 501(c)(3) allowing cash donations to be deducted in the current year up to 50% of AGI, with the remainder carried forward.

Private Foundations are generally 30% organizations with gifts of appreciated property limited to 20%. The PF 30%/20% limits change to the 50%/30% for any PF that distributes substantially all of its program income to 50% organizations.

Also, isn't the carryover available for only 5 years?

Also, if your AGI is high, your itemized deductions are phased out to

20% of their original value.

Yes, it's limited, and 5 years rings a bell.

Once upon a time when dinasaurs roamed the earth and the NFL still played football, that was true. No longer. No phaseout.

I thought the elimination of the itemized deduction phaseout was yet another only-for-2010 thing.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

You are right, but it was extended two years by the Dec 10 Obama Tax Cut. If not extended or made permanent, it lapses on 12/31/12 along with marriage penalty (isn't this phrase redundant?) relief, and the $2000 Coverdell Education Savings Account Limit.

And yet the document I see here

otherwise.

I need to find the 2010 Obama Cut summary. The final version.