Charitable giving with appreciated stock

In short

A friend of mine once wrote a check to his church while a pile of old stock sat untouched in his brokerage account. He never thought twice about it. If you are holding shares that have grown well beyond what you paid, you can often give the shares instead of cash. Doing so can let you skip the tax on the growth. You may also claim a deduction for the full market value, if you itemize and if the shares were held long enough. The charity has to be a qualified one, and the shares should go straight from your brokerage to it. Check with your tax adviser before you move anything, and keep every record.

The whole of it

What it is

I once watched a neighbor pull a crumpled receipt from his coat and say he wished he had known this years earlier. What he wished he had known was simple. Giving a share of stock that has gone up in value is a different act than giving cash, and the tax law treats the two differently.

If you sell a stock for more than you paid, you owe tax on the gain. Say you bought shares for 10,000 dollars and they are worth 40,000 dollars now. The gain is 30,000 dollars. If you sell and then give the cash, you pay tax on that gain first. If you give the shares, the charity receives them, and the charity does not pay tax. You never sell, so you never report that gain.

You have probably noticed that a gift of cash and a gift of stock look alike from the charity's side. The charity gets value either way. The difference lands on your side of the ledger. That is why executives and high earners, who often hold company shares or old investments, pay attention to this.

This applies to shares held in a regular taxable brokerage account. It does not apply to a retirement account, where different rules govern gifts. The charity must also be a public charity or another qualified group. The IRS keeps a search tool called Tax Exempt Organization Search, and you can check any name there before you give.

How it works

A friend of mine who runs a small firm told me the hard part was the paperwork, not the idea. So let me walk you through the path.

First, you pick a charity and confirm it can accept stock. Many can, and many have a form or a contact person for it. Second, you ask your brokerage to transfer the shares directly to the charity's account. That direct transfer matters. If the shares land in your hands first and you sell them, the tax on the gain is yours.

Third, you keep the paperwork. The charity should send you a written acknowledgment. It should say what was given and the date. It will not usually put a value on the gift. Working out the value is your job.

The value of a gift of publicly traded stock is generally the average of the high and low price on the day of the transfer. Your adviser can confirm this for your situation. IRS Publication 526, Charitable Contributions, explains how to value gifts, and IRS Publication 561, Determining the Value of Donated Property, adds detail.

Now the holding period. If you held the shares for more than one year, the gain is long term, and you may deduct the full market value. If you held them one year or less, the deduction is generally limited to what you paid. So a share you bought last month does not get the same treatment as one you have owned for years.

You can only claim the deduction if you itemize. That means you list your deductions on Schedule A instead of taking the standard deduction. If your total itemized deductions fall below the standard amount, the gift will not lower your tax by itself. Some people group several years of giving into one year to clear that bar. Donor advised funds are one tool for that. A fund is simply an account at a sponsoring charity that holds your gift while you decide where to send it.

The numbers, and where to find yours

I sat once with a man who wanted one clean number to hold onto. There are a few, and some change each year, so I will not pretend to give you today's figures.

The limit on how much you can deduct in one year depends on your income. For gifts of long term appreciated stock to a public charity, the cap is a share of your adjusted gross income. That share is the current figure, which the official source publishes each year percent. Adjusted gross income is the total income on your tax return after certain adjustments. Gifts above the cap are not lost. They can carry forward for up to the current figure, which the official source publishes each year years.

The long term capital gains rates that you avoid by giving shares are set by law and adjusted yearly. The rates are the current figure, which the official source publishes each year, and they depend on your taxable income. High earners may also owe the net investment income tax of the current figure, which the official source publishes each year percent on investment gains above a set income line. That line is the current figure, which the official source publishes each year for your filing status. Giving shares can keep that gain off your return.

Where do you find these? The IRS publishes them. Publication 526 covers the deduction limits. Publication 550, Investment Income and Expenses, covers capital gains. The instructions for Form 8283, Noncash Charitable Contributions, explain when you must file that form. You will need Form 8283 if your noncash gifts total more than the current figure, which the official source publishes each year for the year. Your cost basis, meaning what you originally paid, is on your brokerage statements. Look there first.

A worked example

A woman I will call Dana works as a director at a mid sized company. She earns a salary of 300,000 dollars. Years ago she bought 400 shares of a fund at 25 dollars a share. Today each share is worth 100 dollars. Dana wants to give 40,000 dollars to a hospital foundation she cares about.

First, her cost basis. She paid 25 dollars times 400 shares, which is 10,000 dollars. The shares are now worth 100 dollars times 400, which is 40,000 dollars. Her gain is 40,000 minus 10,000, which is 30,000 dollars.

Now suppose Dana sells the shares and gives cash. She would report a 30,000 dollar gain. Say her long term rate is 20 percent, and say the extra investment tax of 3.8 percent applies. The combined rate is 23.8 percent. Her tax on the sale is 30,000 times 0.238, which is 7,140 dollars. After paying it, she has 40,000 minus 7,140, or 32,860 dollars left to give. To give a full 40,000 in cash, she must find the extra 7,140 dollars elsewhere.

Now suppose Dana has her brokerage send the shares directly to the foundation. The foundation receives shares worth 40,000 dollars. Dana reports no gain, so she owes no tax on it. The full 40,000 dollars goes to the cause. If she itemizes and the shares were held over a year, she may deduct 40,000 dollars, subject to her income cap.

Compare the two. Giving shares saves her 7,140 dollars in tax that the sale would have created. Those rates are made up for this story. Yours will differ, so check your own with the sources above.

Where it goes wrong

I have seen good intentions trip over small things. Worth knowing them ahead of time.

One slip is selling first. If you sell the shares and hand over the cash, you have lost the benefit. The gain is yours to report. Have the shares sent directly.

Another is giving stock that has dropped in value. If your shares are worth less than you paid, giving them may not be smart. You would lose the chance to claim that loss by selling. Some people sell the loser, claim the loss, and give the cash. Your adviser can tell you if that applies.

A third is the holding period. Shares held one year or less are treated less kindly. Check the purchase date before you act.

Timing can bite too. For stock, the date of the gift can depend on how the shares are moved. It may be the day the charity receives them, not the day you ask your broker to send them. Brokerage transfers can take days. Ask your broker and the charity how they date a gift, and start early so the year does not run out on you.

Then there is the paperwork. Missing acknowledgments can sink a deduction. So can skipping Form 8283 when it is required. Keep your records.

Last, do not let the tax tail wag the dog. A gift should come from something you care about. The tax treatment is a bonus, not the point.

Questions to answer before you leave this page

Have you looked at your brokerage statements to find what you paid for each holding, and do you know how long you have owned each one? Is the charity you have in mind a qualified group, and have you checked it on the IRS Tax Exempt Organization Search? Do you know whether your itemized deductions would top the standard deduction with this gift included? Have you asked the charity how it accepts stock and who handles the transfer? Do you know your adjusted gross income well enough to see whether a gift this size fits under your yearly cap? Have you talked with a tax adviser who knows your whole picture before you move a single share?