Charitable giving is one of the most popular tax deductions for people who itemize their deductions. Not only are you helping the charitable organization of your choice, but you also get a tax break! The easiest form of charitable giving is, of course, cash donations, but another option is to donate appreciated stock (i.e. stock that has increased in value since its purchase date) held more than one year. You receive two tax benefits because you avoid paying income tax on the stock’s appreciated value, and you get a tax deduction for the donation.
If you donate cash, you can deduct the amount given up to 60% of your Adjusted Gross Income (AGI). However, if you donate appreciated stock that you have held for more than a year, you get a deduction equal to the fair market value of the stock on the donation date up to 30% of your AGI. Although the 30% limit is less than the 60% limit for cash contributions, you avoid paying income tax on the appreciation of the stock. Any amount not currently deductible due to the 30% limitation can be carried forward for five years. This strategy allows taxpayers to receive two tax breaks in the same transaction, a rare occurrence under the tax code. You must have enough deductions to itemize to get the maximum benefit, and with the substantial increase in the standard deduction under the Tax Cuts and Jobs Act, fewer people are itemizing. However, if you are unable to itemize in the year you donate the appreciated stock, you still avoid paying income tax on the increase in value.
Now, let’s look at an example. Two taxpayers each bought stock in Company X two years ago for $5,000, and now that stock is worth $10,000. Taxpayer A sells his stock and donates the cash to a charity. Taxpayer B simply donates his stock directly to the same charity. Let’s assume a 20% capital gains tax rate and a 37% normal tax rate. Taxpayer A must pay tax on the $5,000 worth of appreciation at the capital gains rate of 20% which is $1,000 ($5,000 x 20%). When A donates the $10,000 cash from the sale, he receives a tax benefit of $3,700 (10,000 x 37%). The net effect to A is a $2,700 ($3,700-$1,000) tax savings. On the other hand, because Taxpayer B donated his stock directly to the charity, he pays no tax on the disposition and gets the same $3,700 deduction benefit for a net tax savings of $3,700, or $1,000 more savings than A. As you can see, donating the appreciated stock directly to the organization can substantially increase the tax benefit you receive. If Taxpayers A and B are unable to itemize, A would owe $1,000 tax on the stock sale, but B would avoid any tax on the transaction.
As with applying any tax strategy, it’s important to consult your trusted tax advisor to see if this one may work for your unique circumstances.
Jason Morgan, CPA
Jason Morgan, CPA is an Accountant with GranthamPoole, specializing in individual and corporate taxation. For more information on the above article or any other tax-related topics, please contact your GranthamPoole tax advisor or Advisory Services Team Leader, Mike A. Carraway, Jr., CPA at 601.499.2400 or firstname.lastname@example.org.
The above does not represent tax advice. Each situation is fact-dependent, and you should seek the advice of a competent advisor. GranthamPoole PLLC is a provider of tax, accounting, advisory and strategic services, partnering with clients across a broad spectrum of industries and sizes.