 Ways
to give donations - Appreciated Property
Rather than donating cash, it
is permissible to donate appreciated property (property where
the original cost is less than the current fair market value).
By donating appreciated property, the donor can significantly
reduce the tax liability for a minimal cost while providing needed
funds to charity. When contributing appreciated property, the
donor generally receives a deduction for the fair market value
of the donated property, not the purchase amount it originally
cost the donor. For example, donating shares of stock that were
originally purchased for $500 and are now worth $2,000 results
in a deduction of $2,000.
There is a double benefit of
donating property that has appreciated. First, like cash, the
amount of the contribution can be deducted from the donor's taxes.
Second, by donating property the donor avoids paying capital gains
tax on the amount that the property has appreciated (that is,
the difference between the purchase price and the fair market
value). Had the donor sold the property first and then donated
the proceeds, the benefactor would have had to pay the applicable
capital gains tax for the amount that the property had appreciated.
Consider the following example:
the same taxpayer from the above example is considering donating
shares of company stock instead of cash. A few years ago the stock
was purchased for $500 and it has a current fair market value
of $2,000. Let's assume the combined federal and California tax
rate for long-term capital gain property is 30% and the ordinary
income combined rate is 40%. By contributing stock the total cost
of the donation, in this example, is $750 ($2,000 - $800 reduction
in tax-liability - $450 capital gains tax). Compare this to a
cost of $1,380 for a donation of $1,550 if the stocks are sold
and the proceeds donated. It is important to note the charity
receives $450 more (29%!).
Is this for me?
Though we encourage everyone
to assist his or her community in whatever way possible, every
person's tax situation is different.
As with all forms of contribution,
charitable donations are deductible only if your deductions are
itemized.
For the appreciated property
to qualify as a deductible contribution the property must have
been owned for over one year. Unfortunately, stock options can
not be donated with the same favorable tax results (only actual
shares of stock). Due to the more complicated paperwork involving
the transfer of shares, this strategy probably only makes sense
for gifts in excess of $1,000.
The benefit of eliminating the
capital gains tax burden is only realized when the donated property
was acquired at a cost materially below the fair market value.
In other words, donating a poor-performing stock, while beneficial
to the charity, does not provide the same tax advantages as donating
a stock that has appreciated significantly.
The difference between the fair
market value of the donation and the cost for acquiring the property
becomes a preference item when calculating the state alternative
minimum tax. For this reason it is recommended to contact a tax
professional to discuss this impact before donating appreciated
property.
Questions? Send email to:
SEF
Investment Donations
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