Want To Boost The Tax Benefit Of Charitable Gifts? by Tara Thompson Popernik, AllianceBernstein
With year-end approaching, requests for charitable gifts are pouring in. As you sort through how much you want to give and to which charities, remember that there’s a simple way for US taxpayers to boost the tax benefit of these gifts: Donate appreciated securities, rather than cash.
For US taxpayers in the top (39.6%) federal tax bracket, deducting the value of a $10,000 cash gift to a public charity reduces the federal income tax owed by $3,960. (In states with income tax, the tax benefit may be even higher.)
But gifts of appreciated publicly traded stock or other assets can reduce or eliminate tax on capital gains, in addition to reducing tax on ordinary income (see Display). 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 $5,000 gain, increasing the tax benefit of the donation to $5,150. If he got the stock for nothing—perhaps when he founded the firm—he can also avoid paying the 23.8% tax on the stock’s $10,000 gain, increasing the donation’s tax benefit to $6,340.
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 he or 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 versus 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. The tax rules are complicated, and their impact on a particular individual may differ depending on the individual’s specific circumstances. Please consult with your legal or tax advisor regarding your specific situation.