We’re three months into 2014, and you may be thinking about what charitable donations you’d like to make this year. If you’re planning to make a donation to a qualified 501(c)(3) non-profit organization, make sure to look at your investment portfolio before you write a check.
With the recent stock market gains in 2013, you might find a security with unrealized gains that is suitable to transfer to the charity. If you itemize on your tax return and you are in the 25 percent tax bracket or higher, you may be able to benefit from a “double play” of tax benefits.
The “double play” exists because you receive a charitable deduction for the current fair market value of the security and avoid the tax on the appreciation. For example, if you purchased a stock more than one year ago for $10,000 and it is now worth $20,000, you can transfer the stock directly to charity.
Contact the charity to determine if it has the ability to accept the stock. If it can, the charity will provide a valuation for the stock as of the date of transfer. Once the security is in the charity’s control, it decides whether to sell the investment or hold it.
Additional Tax Savings if you’re in a Higher Tax Bracket
If you’re in the 25 percent or higher federal tax bracket, you could save between 15 percent and 23.8 percent on the appreciation. In our example, by avoiding tax on the $10,000 of appreciation, you could save between $1,500 and $2,380 in federal taxes. You would also have savings on your state income tax return because you avoid tax on the appreciation on that tax return as well.
While this may seem too good to be true, this “loophole” does exist. This is one example of tax policy that is used to drive social action and spur charitable giving. With your tax savings, contemplate making a larger donation. Or perhaps fund a Roth IRA if you meet the criteria.
Some items to consider:
- Security can be a publicly-traded stock or mutual fund.
- You must have owned the security greater than one year. If not, the charitable deduction is limited to the cost basis.
- You must itemize to take advantage of the strategy.
- You must receive a letter from the organization if your donation is greater than $250.
A donation of appreciated securities is limited to 30 percent of your federal adjusted gross income. Excess is carried forward five years. Also starting in 2013, there are some new phase-outs that should be reviewed before finalizing the donation.
Charitable Giving Tax Help
Author: Wendy Shick, CPA, CFP (Mentor office)