Since the height of the recession in 2007, stocks have almost doubled in value. If you're fortunate enough to own stock that has gone up in value since you purchased it, you should consider giving some or all of it to your favorite charity. This will not only help a good cause, but enable you to reap substantial tax savings.
Gifts of stock and other securities are a popular way to give to charity. Gifts of securities include not only publicly traded stocks like Microsoft or Wal-Mart, but gifts of mutual funds, Treasury bills and notes, corporate and municipal bonds, and stock in non-publicly held companies. It’s extremely easy to give stocks and other securities that are marketable—that is, are sold to the public on stock exchanges or over-the-counter markets. No matter how large the donation, there is no need to obtain an appraisal. The value is simply based on what the stock or other security sold for on the exchange on the day of the donation (the average price between the highest and lowest quoted selling prices on the donation day is used).
There are very favorable tax rules for donors who want to donate long-term stock (stock they have owned for more than one year) that has appreciated in value. Basically, the donor never has to pay capital gains on the appreciated stock. This can be a tremendous tax benefit and great incentive for donors to give stock to nonprofits.
Here’s how it works: If someone owns stock for more than one year that has gone up in value, that person can donate the stock to a nonprofit, get a deduction equal to the fair market value of the stock at the time of the transfer (its increased value), and never pay capital gains tax on the appreciated value of the stock. The nonprofit will never owe that capital gains tax either. It can take the stock and either sell it right away and not pay any tax, or it can hold on to it—but it will never owe capital gains tax on the appreciated value the donor realized.
Example: Ari owns 1,000 shares of Evergreen stock, which is traded on the New York Stock Exchange. He paid $1,000 for the shares back in 2005 and they are worth $10,000 today. He gives the stock to his favorite nonprofit, the Red Cross, and deducts its $10,000 fair market value as a charitable contribution. Ari need not pay the 15% capital gains tax on the $9,000 gain in the value of his stock. The Red Cross sells the stock and pays no taxes on the $10,000 it receives. Had Ari sold the stock he would have had to pay a $1,350 long-term capital gains tax on his $9,000 profit (15% x $9,000 = $1,350). This would have left him only $8,650 from the stock sale to donate to nonprofit.
However, these rules don’t work as well in the case of stock that has gone down in value. The tax benefit of never paying capital gains on the appreciated value of the stock doesn’t apply because there is no capital gain. In this situation, it is better to sell the stock, give the sales proceeds to the nonprofit, and deduct the loss. Donors can use the loss to offset gains they had from the sale of other capital assets during the year. In addition, taxpayers can deduct up to $3,000 in capital losses each year from ordinary income (such as salary income, interest, and dividends). Any remainder can be carried forward and deducted in future years. So donors can potentially benefit by realizing the loss instead of simply giving the stock to a nonprofit where there is no tax benefit.
Example: Assume that Ari’s Evergreen stock is worth only $100. He has lost $900 on his investment. He sells the stock and gives the $100 proceeds to a nonprofit, Building Bridges for Justice. He then deducts his $900 loss as a capital loss for the year (he has no other capital gains or losses for the year). He’s in the 28% tax bracket, so this saves him $252 in income tax. Had Ari given the stock to a nonprofit instead of selling it, he would have had no capital loss deduction. Instead, he would have been able to deduct only the $100 fair market value of the stock.