Donating Appreciated Property for Tax Savings
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.