Planning on making charitable donations before the end of the year?
If you are, you should know that a charitable contribution of long-term appreciated securities — i.e. stocks, bonds and/or mutual funds that have realized significant appreciation over time — is one of the most tax-efficient ways to give. The IRS has generous rules governing the treatment of charitable donations of appreciated securities, increasing the popularity of this method of giving in recent years. By simultaneously allowing you to maximize your charitable impact and minimize taxes incurred, this best of both worlds situation provides you with greater flexibility in planning how to utilize your charitable resources.
Donating long-term appreciated securities directly to charity — rather than selling the assets and then donating the cash proceeds — has two key advantages:
Long-term appreciated securities with unrealized gains may be contributed to a public charity and a tax deduction taken for the full fair market value (FMV) of the securities rather than just the after-tax realized proceeds.
Donating the securities, rather than selling them, eliminates the application of capital gains tax that would result from sale of the securities. The more the securities have grown in value, the greater the potential tax savings.
The Basic Rules
The general rule when contributing to public charities is that taxpayers are allowed to take a deduction for the full FMV of donated securities, held for a period greater than one year, rather than deducting only their basis in the property. This deduction is allowed for up to 30% of the donor’s adjusted gross income (AGI). The best part is that the taxpayer does not have to recognize, or pay taxes resulting from, any gain in value on the donated security. This essentially allows you to take the same amount of deduction as you would if you had sold securities and donated the cash proceeds, but without being taxed on the gain resulting from the sale of appreciated assets. Also, deductions from FMV contributions allowed for regular tax purposes are not decreased for computing alternative minimum tax.
Donations to Private Foundations
The rules are slightly different when the contribution is made to a private foundation. Donations to private foundations, other than private operating foundations, must consist of “qualified appreciated stock.” Donations of publically traded securities with a holding period greater than one year, such as stocks that do not exceed 10% in value of the corporation’s total outstanding stock, shares in mutual funds and American Depository Shares (ADSs) generally meet the requirements to be considered qualified appreciated stock. The primary requirement is that the items are actively traded and/or the value of these items is readily available through an established securities market.
Please feel free to contact us and we can help you to maximize your charitable impact during this holiday season and beyond.