Do you own shares of stock that you want to contribute to charity? Before you pull the trigger on a donation, check to see if you are giving away the securities that are best for your tax situation. It can make a big tax difference to itemizers.
The conventional wisdom is to donate low-basis stock you have held a long time. As a result, you can avoid tax on the stock’s appreciation in value. On the other hand, absent any extenuating factors, you might decide to hold onto high-basis stock that you have owned for just a short period of time.
Background: If you donate stock to charity that would have produced a long-term capital gain had you sold it instead of donating it (i.e., you have owned the stock for more than one year), you can deduct the full fair market value (FMV) of the stock on the date of the donation. What’s more, the appreciation in value that occurred during the time you held the stock remains untaxed forever. However, if a sale would have resulted in tax at ordinary income rates had it been sold (i.e., you have owned it for one year or less), your charitable deduction is limited to the basis in the stock. Thus, you might as well keep it.
Example 1: The Crimson Corp. stock you acquired five years ago for $3,000 has a current FMV of $10,000. If you donate the stock to charity, you can deduct the full $10,000. There is no tax due on the $7,000 of appreciation in value.
Example 2: The Clover Corp. stock you acquired ten months ago for $3,000 has a current FMV of $5,000. If you donate the stock to charity, your deduction is limited to $3,000. Because you receive no tax benefit from the $2,000 appreciation in value, you might want to keep the Clover stock, at least until you have owned it for more than one year. Alternatively, you may sell the stock and donate the proceeds. In that case, you can deduct the full $5,000, but you must report a $2,000 short-term gain.
In other words, if you have a choice between donating low-basis stock held more than one year and high-basis stock held a year or less, the low-stock basis stock is usually the better choice. Of course, other factors may affect your situation.
What should you do with stock that has declined in value? If you will benefit from a tax loss at the end of the year, you might sell the stock and then donate the proceeds to charity. Otherwise, if you simply donate the stock, your deduction is limited to its FMV.
Note that there are other possible reasons for selling or holding a particular stock. For instance, if you hold low-basis, long-term stock that you think is about to skyrocket in value, you may want to keep it for the time being. Conversely, if you own stock that you think has reached its peak, you might donate it now.
Factor this into your year-end tax planning. If you have any questions, consult with your professional advisors.