March 4, 2015

Minimize taxes on investments while maximizing charitable donations

In tax planning meetings, we are often asked what the most tax efficient way is to make charitable contributions. One of the most popular and effective ways is donating appreciated securities. When one makes a donation of an appreciated security to a qualified charitable organization, several tax benefits may result.

Oftentimes, clients worry about significant capital gains and related taxes that they may have in the future. However, if they are already planning on making charitable contributions as it is, it usually makes sense to donate securities with significant capital appreciation, in lieu of cash, to a qualified charity.

For starters, by donating securities instead of cash, the client avoids the capital gains tax (20 percent federal) as well as the net investment income tax (3.8 percent) that otherwise would be due on a sale of the securities. This advantage allows a larger donation to a favorite charity than could occur by selling the security and subsequently donating the proceeds since the tax ramifications for the latter move are nonexistent. The logic here is simple: Why pay tax on appreciated securities if you’re planning on donating money to the charity anyway?

Second, not only does the client get to avoid the capital gains tax on the donated security completely but also gets the benefit of claiming a charitable deduction for the fair market value of the appreciated security. There is no concern for the charity either since it will capture the full market value of the gift by selling the securities on receipt. Because of the charity’s nonprofit status, it will not be liable for any capital gains tax.

Donors should keep in mind that the above discussion refers only to long-term securities (held for more than one year). A gift of appreciated long-term securities is deductible at its fair market value, while a gift of appreciated short-term securities is deductible only to the extent of cost basis. Therefore, it is clearly better to gift long-term because you get to deduct the appreciation even though you have not been taxed on it.

This methodology of gifting to charity is particularly helpful when clients are looking to trim appreciated securities in their portfolios without having to realize capital gains. Alternatively, if there are securities that have greatly appreciated – but which the investor is still very bullish about – he or she may donate the appreciated security and immediately repurchase it.

When contributing securities, bear in mind that the contribution amount is limited to 30 percent of adjusted gross income (AGI) in the year of the donation. Charitable contributions that are not deductible due to the AGI limitations may be carried forward for up to five years.

The lesson here? When considering donating securities, be sure to consult with a competent tax advisor.

Marc Minker is the Managing Director at CBIZ MHM, LLC in New York. Marc can be reached at MMinker@cbiz.com.


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