Give away your appreciated stocks and get rewarded by the IRS

Give away your appreciated stocks and get rewarded by the IRS

By Trent Wolfe

Do you give to charities with cash, but often want to give more? Did you know you can gift publicly-traded securities directly to a charity and receive a tax donation for the fair market value? What’s best is the built-in appreciation of the security is not reported as a sale on your individual tax return. Instead of enforcing sale treatment to record the gain as taxable, the IRS allows a double benefit to taxpayers. Section 170(b)(1)(A) of the Internal Revenue Code allows gifts of appreciated securities to not-for-profit entities to be valued for charitable contribution purposes at the fair market value, but it must be held by the taxpayer for longer than 12 months before the donation to the organization.  Taxpayers are encouraged not to donate stocks that have an unrealized loss, as the rules for donated securities with unrealized losses are treated differently.  When the taxpayer gifts the security, the donation record will show the fair market value of the stock on the date of contribution. The charity is allowed to retain ownership for as long as it wants or it can sell the security upon receipt. There is no requirement for the charity to retain ownership for a length of time. Normally, a contribution comes from after-tax dollars, meaning a taxpayer pays income tax on the cash before the contribution is given. In the case of gifting securities held for at least 12 months, the gift comes as a pretax contribution. In the case of a charitable contribution, here is the tax savings when comparing a cash gift versus a gift of stock valued at same dollar amount.

Taxpayer gives a local charity a check for $10,000 in December 2015 after he has sold his IBM stock that he has owned for several years.  Taxpayer had a cost basis for his stock of $2,000, which results in Taxpayer recording a long-term gain of $8,000 on his 2015 tax return. The capital gain is subject to a 15% tax rate, which results in tax of $1,200 owed on the gain. Since Taxpayer has given all proceeds to the charity, he pays the $1,200 from his own pocket.  Taxpayer receives a charitable donation of $10,000 that will help offset the tax owed on the gain.

Assume now, Taxpayer gives the charity his IBM stock worth $10,000 in December 2015. The charitable donation is $10,000 since Taxpayer has owned the stock for several years. Taxpayer does not have any taxable capital gain since Taxpayer gifted the stock. Taxpayer can report a non-cash charitable contribution of $10,000. The gift of the publicly-traded security has now saved the taxpayer $1,200 in federal tax and will also save state and local taxes, since the capital gain would have been included as state income.

When a taxpayer makes non-cash contributions such as this, Form 8283 is required to be filed with the tax return. The IRS requests the name and address of the charity receiving the property, as well as the date of purchase by the taxpayer and the date given to the charity. For securities, the IRS also requires the value on the date of the gift and the taxpayer’s cost basis when purchased.

We are nearing the end of 2015 and if you are looking to benefit a charity, you might want to consider gifting stocks.  If you have thought about selling stocks to receive the cash needed to make your additional contribution, consider asking your broker to give the stock directly to your charity of choice.