Charitable contributions have been a long-standing tax strategy as long as you itemize and your gift qualifies. Did you know you can receive an additional tax benefit if you donate long-term appreciated stock instead of cash to your favorite charity?
Two benefits from one gift
Appreciated publicly traded stock you’ve held more than one year is long-term capital gains property. If you donate it to a qualified charity, you may be able to enjoy two tax benefits:
1) If you itemize deductions, you can claim a charitable deduction equal to the stock’s fair market value, and
2) You can avoid the capital gains tax you’d pay if you sold the stock.
Donating appreciated stock can be especially beneficial to taxpayers facing the 3.8 percent net investment income tax (NIIT) or the top 20 percent long-term capital gains rate this year.
Here’s how it works
Let’s say you donate $10,000 of stock for which you paid $3,000, your ordinary-income tax rate is 37 percent and your long-term capital gains rate is 20 percent. And let’s say you itemize deductions.
If you sold the stock, you’d pay $1,400 in tax on the $7,000 gain. If you were also subject to the 3.8 percent NIIT, you’d pay another $266 in NIIT.
Instead by donating the stock to charity, you save $5,366 in federal tax ($1,666 in capital gains tax and NIIT plus $3,700 from the $10,000 income tax deduction). If you donated $10,000 in cash, your federal tax savings would be only $3,700.
Be careful – TCJA has nearly doubled the standard deduction
First, remember that the Tax Cuts and Jobs Act nearly doubled the standard deduction, to $12,000 for singles and married couples filing separately, $18,000 for heads of households, and $24,000 for married couples filing jointly. The charitable deduction will provide a tax benefit only if your total itemized deductions exceed your standard deduction. Because the standard deduction is so much higher, even if you’ve itemized deductions in the past, you might not benefit from doing so for 2018.
Second, beware that donations of long-term capital gains property are subject to tighter deduction limits — 30 percent of your adjusted gross income for gifts to public charities, 20 percent for gifts to non-operating private foundations (compared to 60 percent and 30 percent, respectively, for cash donations).
Finally, don’t donate stock that’s worth less than your basis. Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to charity.
Minimizing tax and maximizing deductions
For charitably inclined taxpayers who own appreciated stock and who’ll have enough itemized deductions to benefit from itemizing on their 2018 tax returns, donating the stock to charity can be an excellent year-end tax planning strategy. This is especially true if the stock is highly appreciated and you’d like to sell it but are worried about the tax liability. Ciuni & Panichi professionals have been helping businesses and individuals plan for the best possible tax outcome for 45 years. To learn how we can help your business and you contact Nick Leacoma, CPA, Tax Department Senior Manager, at 216-831-7171 or by email here.
© 2018
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