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Donating appreciated stock directly to a charity can offer big tax benefits

As the end of the year approaches, now is the time to consider options for philanthropic gifts

Paul Allen, a CPA and chief executive of Allen, Gibbs & Houlik L.C. in Wichita.
Paul Allen, CPA and chief executive of Allen, Gibbs & Houlik LC in Wichita

This is the time of year when many people turn their attention to end-of-year financial planning, including making charitable gifts to take advantage of tax benefits before the year ends on Dec. 31.

In the process, they might make a common mistake that will cause them to incur an avoidable cost. That mistake is selling appreciated stock and giving the proceeds to philanthropic causes, instead of simply donating the stock directly to the charity.

Donating appreciated securities to a nonprofit organization can be a smart decision, says Paul Allen, a CPA and chief executive of Allen, Gibbs & Houlik L.C. in Wichita.

“Donating securities that have gained value since their purchase may give a dual benefit,” says Allen, chairman-elect of the WSU Foundation Board of Directors. “The donor generally avoids paying long-term gains tax and still earns an income tax deduction.”

To realize the benefits of such a transaction, the stock must have been held for more than a year, says Jane McHugh, a CPA and member of the National Advisory Council.

“It’s a very good way to make a charitable contribution,” says McHugh, ’80. “You avoid the federal income tax on the gain, you avoid the state income tax on the gain and you avoid the new 3.8 percent tax on investment income. There’s a big benefit from a tax standpoint to contributing appreciated securities.”

Jane McHugh, a CPA and member of the National Advisory Council
Jane McHugh, CPA and member of the WSU Foundation National Advisory Council

Here is an example: You bought stock for $10,000 more than a year ago and today it is worth $20,000. You plan to donate the entire amount to a charitable organization. If you sold the $20,000 stock instead of donating it, you would pay capital gains tax on the $10,000 gain in value. The tax rate for long-term capital gains tax is 15 percent for those in the 25 to 35 percent federal tax brackets. (If the taxpayer is in the 39.6 tax bracket, the tax rate is 20 percent.) Therefore, the tax savings for donating rather than selling the stock would be $1,500 ($10,000 x 15 percent.) for those in the 25 to 35 percent tax brackets or $2,000 ($10,000 x 20 percent) for those in the higher bracket.

In addition, you can claim a deduction of the market value of the donated shares — the full $20,000 — as a charitable donation deduction. If you are in the 25 percent federal tax bracket, this could generate another $5,000 ($20,000 x 25 percent) in tax savings. This brings your total federal tax savings to $6,500. If you are in a higher tax bracket, your donation deduction will be even more. Also consider this: You are giving a gift that is two times what it originally cost you.

Consult your tax professional or attorney about end-of-year charitable giving that makes the most sense for your financial situation, Allen and McHugh said.

 

circle arrow To learn more about end-of-year financial options for philanthropic giving, contact Skip Swearingen, WSU Foundation controller, at 316-978-3816 or skip.swearingen@wichita.edu.