global Tax
February 11, 2020
Want to help a charity but not sure if you should give shares of stock or just cash? It depends on a few things...including your income.
*Editor's Note: This blog was originally posted in February 2017 but has been updated as of February 11, 2020 for accuracy and comprehensiveness.
Charitable contributions are a great way to benefit those in need with the added perk of a tax deduction. But what is the best way to give? Cash or appreciated stock?
A refresher on charitable contribution deductions
As we point out in a past blog, a common tax saving method, especially at year-end, is donating to charity. A donation to a qualified charitable organization can be deducted on schedule A of your federal income tax return as an itemized deduction. Donations can be made in the form of cash, property or appreciated shares of stock.
Cash vs. stock donations
Generally, it is much more beneficial to donate appreciated securities rather than cash.
Why?
When you donate appreciated securities you get a deduction for the Fair Market Value (FMV) of the stock. You are able to avoid the capital gain if you were to sell the securities.
Should I donate shares with a high or low basis?
This works best if you are donating shares that have the lowest basis. If you have a very low basis stock position that you still want to maintain in your portfolio, you can donate that low basis block of shares and buy the same number of shares currently. You avoid the capital gain and, the wash sale rules do not apply, so you don’t have to wait 30 days to re-purchase.
Then, you still have the same value in your portfolio, but you’ve essentially given yourself a “step-up” in basis, without having to recognize a gain!
Is it ever more beneficial to donate cash?
The only time it might be less beneficial to donate appreciated stock is if your income is very low. The deduction for donations of appreciated stock to public charities is limited to 30% of your AGI whereas cash donations are subject to a 60% of AGI limitation. Any amount over the 30% threshold would be a carryover for up to 5 years. So, the full deduction may take several years to complete.
2019 Update
The TCJA changed the federal income tax rates on capital gains tax and dividends which are scheduled to last through 2025.
Here’s what’s new.
While the TCJA retained the 0%, 15% and 20% on long term capital gains (LTCGs) from assets you’ve owned for more than one year and for qualified dividends, these rates now have their own brackets. Under prior law, these rates were tied to ordinary income brackets.
For 2019 filing season, here are the rate brackets for LTCGs and dividends:
Bracket | Single | Joint | Head of Household |
0% | $0-$39,375 | $0-$78,750 | $0-$52,750 |
15% | $39,376 | $78,751 | $52,751 |
20% | $434,551 | $488,851 | $461,701 |
Note: The 2020 brackets have been released and are adjusted for inflation.
Though it may be tempting to simply write a check to a charitable organization, giving appreciated stock is a much more effective donation method in terms of tax savings! Contact any member of our Tax Services Team for more guidance.
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As a tax expert with extensive knowledge in the field, I can confidently delve into the intricacies of the concepts mentioned in the provided article dated February 11, 2020. The article primarily discusses the optimal ways to make charitable contributions, specifically comparing the donation of cash versus appreciated stock. Let's break down the key concepts used in the article:
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Charitable Contribution Deductions: The article emphasizes the importance of charitable contributions as a method for tax savings. When an individual donates to a qualified charitable organization, the donation can be deducted on Schedule A of the federal income tax return as an itemized deduction.
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Forms of Donations: Donations can be made in various forms, including cash, property, or appreciated shares of stock. The focus of the article is on the comparison between cash and appreciated stock donations.
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Benefits of Donating Appreciated Securities: The article highlights the advantages of donating appreciated securities over cash. When appreciated securities are donated, the donor can receive a deduction for the Fair Market Value (FMV) of the stock. Importantly, this allows the donor to avoid capital gains taxes that would be incurred if the securities were sold.
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Low Basis Stock Donation Strategy: The article suggests that donating shares with the lowest basis is most beneficial. By donating low basis stock that one wishes to maintain in their portfolio, they can avoid capital gains and do not have to adhere to wash sale rules. This strategy essentially provides a "step-up" in basis without recognizing a gain.
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Income Level Considerations: The article notes that the choice between donating cash or appreciated stock may depend on the donor's income level. Donations of appreciated stock to public charities are subject to a 30% of Adjusted Gross Income (AGI) limitation, while cash donations have a 60% of AGI limitation. Donations exceeding the 30% threshold may be carried over for up to five years.
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Impact of Tax Cuts and Jobs Act (TCJA) in 2019: The article acknowledges changes brought about by the TCJA, specifically in federal income tax rates on capital gains and dividends. It mentions the retention of the 0%, 15%, and 20% rates on long-term capital gains and dividends, which now have their own brackets.
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Tax Rate Brackets for LTCGs and Dividends: The article provides the tax rate brackets for long-term capital gains (LTCGs) and dividends for the 2019 filing season, specifying rates for single, joint, and head of household filers.
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Encouragement of Appreciated Stock Donations: The article concludes by emphasizing that, despite the temptation to write a check for charitable donations, giving appreciated stock is a more effective method in terms of tax savings.
In summary, the article provides comprehensive guidance on the tax implications of charitable contributions, specifically emphasizing the advantages of donating appreciated stock over cash, while considering individual income levels and recent changes in tax legislation.
