Clients are always asking me for tax saving measures to take before the end of the year. While most suggestions involve spending money to get a dollar for dollar deduction (cash donations to charity, increased retirement plan contributions, etc.), the Internal Revenue Code offers a creative planning opportunity.
If you own appreciated property (stock in this example), you can get a deduction for the value of this property if you donate it to a qualified charity.
Let’s look at a simple example:
- 1,000 shares of XYZ Company stock purchased for $10/share in 1990 (total cost = $10,000)
- Assume shares of XYZ Company stock are currently selling for $100/share (total value = $100,000)
- If we stop right here we can see that the taxpayer has an unrealized long-term capital gain of $90,000. Assuming the taxpayer is not in the highest marginal income tax bracket, selling the stock would result in a $13,500 ($90,000 x 15%) tax hit.
- Instead, let’s assume the taxpayer donated the stock to the LSU Foundation. Let’s also assume the taxpayer’s marginal tax bracket is 33%.
- The taxpayer would receive a $100,000 charitable donation deduction which would save $33,000 in Federal tax ($100,000 x 33%)
- Effectively the taxpayer has converted a $10,000 investment into $33,000 of Federal tax savings. Did I mention that $0.00 gain is recognized on this transaction? Not only do you get a deduction for the fair market value of the property, but the unrealized gain is not recognized. It simply goes away.
The example above is meant to be a simple one (i.e. does not consider phase out of itemized deductions or the 30% AGI limitation used when donating appreciating stock) but the point is clear. Donating appreciated stock (assuming the taxpayer’s alternative is donating cash/check) is a great way to save income tax without depleting cash.