When we contribute to charitable organizations, most of us go the easiest, most familiar way and just write checks or use credit cards. So the charities get the cash, and we get to deduct those amounts.
But anyone who plans to donate a sizable sum should be aware of another way that can save considerably more in taxes. Instead of sending checks, consider contributions of appreciated properties, such as shares of individual stocks, mutual fund shares, real estate or other investments that have gone up in value and would be taxed as long-term capital gains were they to be sold.
A donation of appreciated property is an often-overlooked strategy that makes good sense. The measure of your charitable deduction is the appreciated value of the asset, undiminished by the federal and state taxes that become due on the accumulated profit if you sell the property, effectively lowering the donation’s worth. The IRS siphons off a maximum of 15 percent of your gain from the sale, a levy that drops to 5 percent if you are in the two lowest income tax brackets of 15 and 10 percent, plus applicable state income taxes.
To illustrate, you intend to give $10,000 to Roosevelt University. Your long-term stockholdings include some shares that you acquired more than a year ago for $4,000 and are about to unload for $10,000. You reap a double tax benefit when you contribute stock worth $10,000, rather than the same amount in cash. Going the stock route makes no difference to Roosevelt; as a tax-exempt entity, it incurs no capital-gains tax on the sale of the shares and ends up with close to the same amount of cash. But it does make a significant difference in the size of your tax tab. Besides the savings generated by a deduction for a $10,000 cash gift, you sidestep the tax of as much as $900 that is due on the $6,000 gain if you sell the stock.
Uncertain about whether to surrender your position in some appreciated stock? Then consider donating the stock and using the money that you would have otherwise donated to buy back the shares for their current market price. That way, tracking the numbers in my example, you preserve a charitable deduction of $10,000, as well as eluding tax on the $6,000 gain. Moreover, brokerage commissions aside, a repurchase of the stock enables you to measure any gain or loss on a subsequent sale against a cost of $10,000, not $4,000.
Be mindful of the paperwork. Gifts of stock or similar property are allowed as deductions for this year only if you complete delivery of those donations by Dec. 31. Make sure to allow enough time for completion of the legal paperwork. If you unconditionally deliver or mail a properly endorsed stock certificate to Roosevelt, the donation is considered completed on the date of delivery or mailing, provided the certificate is received in the ordinary course of the mails. But if you deliver the certificate to your bank or broker or to the issuing corporation as your agent for transfer to the name of Roosevelt, the donation is not completed until the date the stock is transferred on the corporation’s books, a process that could take quite a while.