For investors who are planning on giving money to a favorite church or charity before year-end, consider one of the greatest charitable-giving tax strategies in the tax code.
If you have highly appreciated stock in a non-retirement account, in most cases, you can give away an amount up to 30% of your adjusted gross income in one year and get a double tax advantage!
And if you go over this AGI limit, you can carry over the excess amount of donated stock until it's used up, as long as you get it done over the next five years with the 30% AGI annual limit.
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To get the double tax savings, don't sell the appreciated stock before you donate it. Instead give the appreciated stock away to the charitable organization. This way you'll avoid paying all capital gains tax.
You also are not penalizing your favorite charity or church because qualified tax-exempt organizations don't have to pay tax when they sell an appreciated asset.
If you held the stock for more than a year, you get a second round of tax savings—the larger deduction you receive since you're able to deduct the entire pre-tax value of the stock.
To illustrate, let's say Bob bought ABC stock five years ago for $10,000 and since then it's doubled in value to $20,000. Bob wants to donate this stock to his church's building fund. Bob is in a 25% tax bracket, which puts him in a 15% long-term capital gains tax bracket.
If Bob sells the stock before donating the proceeds, he will trigger a $10,000 capital gain and owe $1,500 in-long term capital gains tax (15% of the $10,000 gain). He now has $18,500 left to donate to the church, giving him an $18,500 tax deduction. In the 25% tax bracket, this will save him $4,625 in taxes (25% of the $18,500 donation).
Bob's total tax savings is $3,125 ($4,625 tax savings minus the $1,500 LTCG tax owed). Also Bob's donation to the church is reduced to $18,500 ($20,000 of stock minus $1,500 LTCG tax owed).
Alternatively, if Bob just gives the stock to the church, he avoids triggering the capital gain and saves the $1,500 in LTCG tax. Also, Bob is able to deduct the entire $20,000 value of the stock giving himself a larger tax deduction, saving Bob $5,000 in taxes (25% of the $20,000 donation) instead of the $4,625 in tax savings from the lower deduction in the first example.
In sum, by donating the stock directly instead of selling it and donating the proceeds, Bob's total tax savings is $5,000 rather than just $3,125. Also, Bob is able to give a larger $20,000 donation to the church instead of $18,500. And remember the church keeps all of the sales proceeds because they will owe no taxes when they sell the stock.
You should use a different tax strategy if you want to give stock that has depreciated in value. In this case, a better approach would be to first sell the stock to generate a realized loss, and then give the cash to the charity. This way you'll have a capital loss to offset current and future taxable capital gains. Plus, you can use up to $3,000 of your capital losses each year as a deduction against ordinary income. And of course you will still get a tax deduction on the sales proceeds of the stock that you donate to the charity.
However you donate, remember the stock should be given to a qualified charity. You can ask to see the organization's IRS determination letter, or go to the IRS website and check "IRS Exempt Organizations Select."
Also, the stock must be donated before the close of your tax year for it to be deductible, so... hurry. (And keep this strategy in mind for future years.)
Mike Piershale, ChFC, is president of Piershale Financial Group in Crystal Lake, Illinois. He works directly with clients on retirement and estate planning, portfolio management and insurance needs.
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