Gifting appreciated stock

In short

A friend of mine once gave to his church by writing a check, and then sold his stock to cover it. He paid tax on the gain for no good reason. If you have stock that has grown a lot, you can often give the shares themselves to a charity instead. When you do, you generally skip the capital gains tax on the growth. You may also be able to deduct the full value of the shares if you itemize your deductions. The charity needs to be a qualified one, and the full deduction rules turn on how long you held the shares, so check that first. Move the shares directly to the charity rather than selling them first. Keep your paperwork, because the IRS asks for proof. Good giving is a pleasure, and this way it can cost you less.

The whole of it

What it is

I once watched a neighbor carry a heavy sack of feed across a muddy yard, only to find the barn door locked on the far side. He had worked hard and gotten nowhere. Plenty of generous people do the same with their money.

Gifting appreciated stock means giving shares of a stock you own to a charity, rather than giving cash. "Appreciated" just means the shares are worth more now than what you paid for them. That gap between the price you paid and today's value is your gain.

If you sold the shares, you would owe tax on that gain. If you give the shares away, you generally do not. The charity is usually tax exempt, so it can sell them and keep the whole amount. You have given more, and you have paid less.

You have probably felt the pull of two goals at once. You want to be generous, and you want to keep your tax bill fair. This tool lets you do both. It is not a trick. It is a plain feature of the tax code, and Publication 526 from the IRS lays out how it works.

How it works

A friend of mine, a retired schoolteacher, likes to say that the simplest road is the one you should check twice. So let us walk it slowly.

You pick a charity that is qualified under the tax code. Many well known charities are, and the IRS keeps a search tool on its website called Tax Exempt Organization Search. You can look up any group there before you give.

Next, you move the shares straight to the charity. This is done by a transfer between your brokerage account and theirs. Most charities have a form or a contact for this. The word to remember is directly. If you sell the shares first and then give the cash, the tax benefit does not apply.

Then you claim the gift on your tax return. You report it on Schedule A, which is the form for itemized deductions. Itemizing means you list your deductions one by one instead of taking the standard amount. The gift only helps you if you itemize.

Two things control how big your deduction can be. The first is how long you held the shares. The second is a cap tied to your income. IRS Publication 526, called Charitable Contributions, explains both. For stock held more than one year, the deduction is generally the fair market value on the day you give it. For stock held one year or less, the deduction is generally limited to what you paid.

The cap is a share of your adjusted gross income, which is your income after certain adjustments. For gifts of long term stock to a public charity, the cap is the current figure, which the official source publishes each year of your adjusted gross income. If you give more than the cap, the extra can generally be carried forward to later years. Publication 526 spells out how many.

The numbers, and where to find yours

You have probably noticed that tax rules love a number. Here are the ones that matter, and where to find them.

The long term capital gains rates are set by law and change by year. You can find the current rates on the IRS page for Topic No. 409, Capital Gains and Losses. The rate you face depends on your taxable income. Higher earners may also owe the net investment income tax, which is an added tax on investment gains for people above certain income lines. The rate is the current figure, which the official source publishes each year and the income line for a single filer is the current figure, which the official source publishes each year. The IRS explains this on its page called Net Investment Income Tax.

Your own cost basis is the other number. Basis means what you paid for the shares, plus certain costs. You will find it on your brokerage statement or on Form 1099 B. If you cannot find it, ask your broker. It tells you how big your gain is.

For the deduction, the cap is the current figure, which the official source publishes each year of adjusted gross income, as noted above. Your adjusted gross income sits on your Form 1040, so you can read it straight from last year's return to get a rough picture.

There is also a paperwork line. If your noncash gifts total more than a set amount, you must file Form 8283. The line is the current figure, which the official source publishes each year. For larger gifts you may need a written appraisal, though that rule is aimed mostly at property that is not publicly traded. Read the Form 8283 instructions for the details.

One more number matters. The charity must send you a written receipt for any gift of the current figure, which the official source publishes each year or more. The IRS asks donors to hold on to it.

A worked example

A woman named Denise earns 240,000 dollars a year. She bought 100 shares of a stock years ago for 20 dollars each. Her cost, or basis, is 100 times 20, which is 2,000 dollars. Today each share is worth 150 dollars. The shares are worth 100 times 150, which is 15,000 dollars.

Her gain is 15,000 minus 2,000, which is 13,000 dollars. She wants to give 15,000 dollars to a qualified charity she loves.

First, picture her selling the shares and giving the cash. She sells for 15,000 dollars. Her gain is 13,000 dollars. Suppose her federal rate on that gain is 20 percent. That tax is 13,000 times 0.20, which is 2,600 dollars. Now suppose she also owes the net investment income tax at 3.8 percent. That adds 13,000 times 0.038, which is 494 dollars. Her total tax is 2,600 plus 494, which is 3,094 dollars. She now has 15,000 minus 3,094, which is 11,906 dollars left to give.

These rates are her own plain figures for this story. Your rate may differ.

Now picture her giving the shares directly. The charity receives all 15,000 dollars worth of stock. Denise owes no tax on the 13,000 dollar gain. She held the shares more than one year, so if she itemizes, she may deduct 15,000 dollars, up to her cap.

The difference is clear. By giving the shares, she delivers 15,000 dollars to the charity instead of 11,906. That is 15,000 minus 11,906, which is 3,094 dollars more working for a cause she cares about. She also skips the 3,094 dollar tax bill. Same shares, same heart, better result.

Where it goes wrong

A man I know once did everything right except one small thing. He sold the stock on Tuesday and gave the cash on Wednesday. His gift was kind. His tax bill came out higher than it needed to be, since the gain was taxed before the gift was made. The sale had already happened, so the benefit was gone.

Watch the holding period. If you have owned the shares for one year or less, your deduction is generally limited to your basis. That can shrink the benefit a lot. Count your days before you give.

Be careful with shares that have lost value. If your shares are worth less than you paid, giving them does not help the way it does for gains. In that case, a sale may let you claim the loss, and then you could give the cash. The IRS explains how losses work in Publication 550, Investment Income and Expenses. Rules on losses have limits, so read before you act.

Do not forget the itemizing rule. If you take the standard deduction, your gift will not lower your tax. Add up your itemized deductions first and compare.

Mind the cap. A very large gift can pass the percent limit on your adjusted gross income. The extra can generally be carried forward, and Publication 526 explains how.

Keep your records. The IRS looks for the charity's receipt, your brokerage record of the transfer, and your basis. If you must file Form 8283, fill it in fully. A missing form can cost you the deduction.

Finally, check the charity. A gift to a group that is not qualified earns no deduction. Look it up first.

Questions to answer before you leave this page

Do you know which shares you own have grown the most, and what you paid for them? Have you held those shares for more than one year? Which qualified charity would you most like to help, and have you checked it on the IRS search tool? Do you itemize your deductions, or will you take the standard deduction this year? Where does your gift sit against the cap on your adjusted gross income? Have you asked the charity how it accepts stock, and have you asked your broker how to make the transfer? And will you keep the receipt and the forms in one safe place, so that your good deed is easy to prove?