Donating Stock Lets You Share in the Appreciation

The level of charitable giving often rises as the year winds down, with more households motivated to help out during the holidays or just looking for some last-minute tax reductions.

While there are numerous ways to make meaningful gifts, one way to maximize a donation--not to mention a deduction--is to give appreciated stock held for a year or more, rather than cash. (It will be greatly appreciated by the charities.)

For some households, that won’t be too difficult a task. After investing during the course of the long bull market, many folks have seen their stock portfolios increase significantly in value. Even now, with the market fluctuating, a lot of investors are still ahead of the game.

Financial advisors prefer contributions of appreciated stock to cash for many reasons.

For one thing, donors can take a deduction worth the full fair-market value of the appreciated shares. At the same time, they won’t have to pay a capital-gains tax when the stock is sold. That’s a doubling up on tax benefits.

“Not only do you avoid taxes but you get a big income tax deduction--and you’ve done something that’s good,” said William C. Newell, president of Atlantic Capital Management Inc. in Sherborn, Mass., which uses this tax strategy for many of its wealthy clients.

Newell cautions against donating stock that has depreciated in value, advising instead to sell the investment and give the proceeds to charity. “By selling first, the investor will secure a capital-loss deduction and a deduction for the cash contribution,” he said.

Stocks can be given through a straight donation or through a trust fund, such as a charitable remainder trust. Most financial companies offer such programs.

There are some limitations to be aware of when making stock donations.

The donated stock must be held for more than a year to qualify for the tax benefits. Otherwise, it will be treated as “ordinary income property” under the tax rules. So, in the above example, your charitable deduction would be limited to the stock’s $2,000 cost, assuming you sold it within the year it was bought.

Also, there are restrictions on the amount of tax deductions you can take. For donations to public charities, deductions can be as much as 30% of adjusted gross income. For gifts to private foundations, it can be as much as 20%. Either way, you’re required to file Internal Revenue Service Form 8283, “Non-Cash Charitable Contributions,” with your tax return.