Generally speaking, Americans are a charitable group. As the most charitable country in the world, the United States has enjoyed a great tradition of generosity. During 2009, Americans gave approximately $300 billion to charity for a wide variety of reasons. One of the hopefully lesser, but still important, reasons for giving is the tax benefit offered by the IRS for those who give.
Cash is the most common gift to IRS approved charities, however, the tax benefits of giving appreciated securities are worth considering. Current tax laws allow taxpayers to gift appreciated assets to charitable organizations and to take an income tax deduction based on the fair market value of those assets. If you give appreciated securities to your charity you are also able to escape capital gains tax on the appreciation. It’s important that your holding period for the securities you intend to gift is greater than one year. If the securities have been owned for one year or less, the IRS only allows you to claim a deduction based on the price you paid for the stock or other investment.
As an example, let’s assume you would like to gift $5,000 to your church or favorite charity. You could write a check to the charity which would provide you with a $5,000 deduction and the charity with $5,000. Choosing instead to give $5,000 worth of stock, for which you paid $1,000 ten years ago, would still allow you to take a $5,000 deduction, however, there is an additional benefit. You have also bypassed the capital gains tax that would have been required if you had sold the shares. In this case, the $4,000 gain at the current 15% capital gains tax rate would equate to $600 of tax which is avoided in this process.
Giving securities involves a bit more work than simply writing a check, but the minor inconvenience may be offset by the financial benefit. In addition, most brokerage firms are willing to assist with the gifting process if your securities are held at the firm.
As always, be sure to clarify your tax issues or benefits with your accountant or tax adviser. They will probably agree that gifting appreciated securities is a solid strategy for the charitably minded investor.
Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Jay Brooks is managing director of Brooks, Moore & Associates Inc. Submit questions to his attention by writing to Business Editor John Vass Jr., Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by e-mailing him at jvass@timesfreepress.com.