BGBC Partners, LLP Tax Update: Donating Appreciated Stock to Charities
Most individuals donate to the same charitable organizations each year (church, national organizations, colleges, Goodwill, etc.), and generally, the same type of donation is given to each of these organizations as well. Cash is the most common means of donating, but many donate clothing and household goods to Goodwill and other similar organizations. However, there is another donatable asset that you may not have considered: Securities with an appreciated value held outside of a retirement plan.
The deductible amount of a donation for property other than cash is the fair market value (FMV) of that property at the time your contribution is made. Generally, most charitable organizations like those noted above are 50%-limit organizations. This means that your total contributions to these types of organizations cannot exceed 50% of your Adjusted Gross Income (AGI) for the year.
One advantage of donating appreciated securities is that you do not report the realized gains as income on your tax return, but rather report them as a charitable contribution deduction, which are considered one category of Itemized Deductions. However, when donating securities, there are a few issues to consider.
One issue is determining whether the contribution would be recognized as a long-term or a short-term gain on the date contributed. Short-term gains are from securities held for one year or less, while long-term capital gains are recognized on securities held more than one year.
Short-term gains are considered ordinary income. They are eligible for the 50%-limit of your AGI, but the amount you can claim as a deduction is limited to the lesser of the FMV on the date of the contribution or your basis in the property. Long-term gains are capital gain income. Contributions of capital gain property can be deducted to the extent of their FMV on the date of contribution. However, the total amount of your capital gain contributions for the year cannot exceed 30% of your AGI, rather than 50% of your AGI.
Another issue may be determining whether to increase the limitation amounts of your AGI. When donating long-term capital gain property, you can elect to reduce the contribution amount to your basis in the property and thereby obtain the higher 50% of AGI limit.
Anytime your charitable contributions exceed these applicable AGI limits of 30% and 50%, the excess amount is not lost. The excess is carried forward for up to five years. The amounts carried over are subject to the same limitations in subsequent years as they were in the year contributed.
As you can see, there are many aspects related to donations of appreciated securities that you should consider: contribution amounts, AGI limitations, and possible AMT issues among others. Therefore, be sure to consult your tax advisor to make sure you get the maximum benefit.