Donating Appreciated Securities: More Valuable than Ever

On January 3, 2013, President Obama signed The American Taxpayer Relief Act of 2012 to avert major portions of the “fiscal cliff” from going into effect. Included in the Act are some tax increases. As you plan your charitable activity this year, keep in mind the numerous tax benefits connected to donations of appreciated long-term securities to give you a better tax deal.

Given the stock market, which has generally been up over the past year or two, you may find you have big gains in some stocks. Rather than selling them and donating the proceeds, or using other cash for your charitable giving, take advantage of the “double play” offered and make your charitable gifts with appreciated long-term securities.

When you donate appreciated long-term securities you do not have to pay any capital gains taxes associated with those securities. So although The Act increases the top tax rate on capital gains and qualified dividends from 15% to 20% (for individuals with taxable income above $400,000 and $450,000 for couples filing jointly, respectively) your gift of appreciated long-term securities can side-step the increase entirely, giving you a nice tax savings.

But there is a “double play” of tax benefits when you donate appreciated long-term securities: you can also take an income tax charitable deduction for the full fair market value of the donated securities up to a maximum of 30% of your adjusted gross income (AGI). Any amounts in excess of the 30% limit can be carried forward for up to five years.

But be careful here: this will not work if you have owned the shares of stock or a mutual fund for less than one year. If the shares were held for a year or less, the shares would be treated as ordinary income property, and the charitable deduction would be limited to the cost basis of the shares.

Lastly, consider donating long-term appreciated stocks or mutual funds with an unknown or hard-to-find cost basis to save yourself the research of finding the tax basis for the shares. When you donate long-term appreciated stocks or mutual fund shares you do not need to know what the cost-basis was because your charitable tax deduction is the entire fair market value of the shares. It eliminates your need to research the basis and can be much easier than searching the history for the exact cost basis of each share you own, especially if you bought them several years ago.

Overall, the tax planning benefits of donating appreciated shares of stock or mutual funds versus giving outright cash may be substantial. Consult with your tax advisor on the best asset to donate.

For more information, contact Bill Roller at wroller@albany.edu or 518-956-8312.