Charitable contributions to eligible charity organizations present an opportunity for self-directed workers to do good for society and their bottom lines. This is because qualifying charitable contributions—from cash donations to donations of personal or ordinary income property to charity volunteering expenses—are tax-deductible. But before you write a check to your favorite nonprofit, you should know about a lesser-known form of charitable giving that can help you maximize your charitable contribution deduction: donations of appreciated stock.
What’s the Advantage of Donating Appreciated Stock?
Long-term capital gain property including stocks, bonds and mutual funds that are held for more than one year can be either donated directly to charitable organizations or sold and donated after you pay capital gains tax on it. Capital gains tax refers to the tax you pay on the profit from the sale of an investment or property. The capital gains tax rate itself depends on your income.
If you are an investor whose portfolio includes unrealized gains from appreciated capital gain stock, for example, and you would like to donate this stock, donating it directly to a charity allows you to take a bigger deduction and the charity to receive a bigger donation than had you sold the stock and donated the net proceeds after capital gains tax payment. Why is this?
Donations of appreciated assets can generally be deducted at their full, fair market value, or the price at which property would change hands between a willing buyer and a seller. For publicly-traded securities like stock, the fair market value is considered to be the average of the high-low price on the date of transfer. As a bonus, generally, neither you nor the charity are required to pay capital gains tax on the appreciated stock donation — allowing you to garner more sizable charitable contribution deductions and the charity to make the most of your donations.
There are a few exception scenarios when you must reduce the fair market value by any amount that would have been long-term capital gain had you sold the property at its fair market value. Examples of such scenarios can be viewed in IRS Publication 526.
Charitable Contribution Deduction Limitations for Capital Gain Property
The amount of your charitable contribution deduction cannot be more than 30 percent of your adjusted gross income (AGI) for capital gain property like stock if you calculate your charitable contribution deductions using the asset’s full fair market value without reduction for appreciation.
This special 30 percent limit does not apply if you choose to reduce the fair market value of the property by the amount that would have been long-term capital gain had you sold the property. The 50 percent AGI limit would apply in this scenario.
Use Worksheet 2 in IRS Publication 526 to figure charitable contribution deductions for capital gain property like appreciated stock. The unused deduction amounts that you cannot use in the current year because they exceed your AGI limits can be carried forward for five years.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.