Income Tax: Get Smart About Giving by Tara Thompson Popernik, AllianceBernstein

With the year-end drawing near, many people are starting to think about how much to give to tax-deductible causes—and which causes to support. But too often, even financially sophisticated people miss a simple way to boost the tax benefit from their charitable donations: by giving appreciated securities, rather than cash.

For someone in the top (39.6%) tax bracket, deducting the value of a $10,000 cash gift to a public charity reduces the federal income tax owed by $3,960. It thereby cuts the effective cost of the gift to $6,040. In states with income tax, the effective cost may be even lower. Gifts of appreciated publicly traded stock or other assets not only reduce tax on ordinary income, they can also reduce or eliminate tax on capital gains, as the Display below shows.

Income Tax

Someone in the top bracket who donates $10,000 in publicly traded stock he bought for $5,000 can avoid paying the 23.8% tax on the stock’s $5,000 gain. The extra tax savings would cut the effective cost of his donation to $4,850.

Someone in the top bracket who donates $10,000 in stock that he got for nothing—perhaps when he founded his firm—can avoid paying the 23.8% tax on the stock’s $10,000 gain. The extra tax savings would cut the effective cost of his donation to $3,660.

Limitations

To receive a deduction for the fair market value of a capital asset, it must be held for more than one year.  The tax code permits charitable deductions of up to 50% of adjusted gross income (AGI) in the year of the cash gift, and up to 30% in the year of the gift of appreciated stock. However, the deduction can be carried forward for five years. Deferring a deduction is valuable if a taxpayer wants to give more than she can deduct in one year—perhaps to help a charity get a matching grant.

The rules around charitable giving are complex. The limitations on the income tax deduction vary with the donor’s income level, the type of property being donated, and the nature of the recipient charity (for example, a public charity vs. a private foundation). Documentation requirements for charitable donations include appraisals in some cases. Consulting your tax advisor about your specific situation is critical.

The views expressed herein do not constitute and should not be considered to be legal or tax advice.

Tara Thompson Popernik is Director of Research in the Wealth Planning & Analysis Group at Bernstein Global Wealth Management, a unit of AllianceBernstein Holding LP (NYSE:AB).