A Cautionary Tale About Charitable Donations
February 10, 2014 by Stephanie Potash
If you want to support a favorite charity — and collect hefty tax deductions — consider giving away appreciated assets that you’ve owned for more than a year. You’ll avoid capital gains tax and get a tax deduction for your generosity.
For example, let’s say you want to give $10,000 worth of stock or mutual fund shares. You purchased the shares a few years ago for $4,000. You get a deduction for the fair market value of $10,000 and you avoid the long-term capital gains tax. The charity can sell the shares for $10,000 and also not owe any tax. If you held the shares and sold them, they’d be worth only $9,100 to you after paying the 15 percent tax on the $6,000 long-term gain.
But many taxpayers don’t know that all charities aren’t created equal. Make sure you donate appreciated assets to “50 percent charities,” which include religious groups, schools, hospitals, and public charities. There are also “30 percent charities,” such as veterans’ organizations, domestic fraternal societies and some private foundations.
Although the IRS calls them 50 percent charities, you can deduct only as much as 30 percent of your adjusted gross income (AGI) in the year of the gift when you contribute appreciated securities. If your AGI is $100,000 and you give $40,000 in stock to your alma mater, you can only deduct $30,000. The remaining $10,000 must be carried forward to another year.
If you donate cash to these charities, however, you can deduct as much as 50 percent of your AGI. With a 30 percent charity, you can give as much as 30 percent of your AGI in cash, but only 20 percent in appreciated assets. If you want to make a large donation, give away appreciated securities but keep it to 20 percent of your AGI. Don’t give away any other stock gifts in the same year to avoid confusion.
The Bottom Line: Keep it Simple
- Give modest cash gifts to 30 percent charities.
- Save your appreciated stock gifts for 50 percent charities, and keep them to no more than 30 percent of your AGI in any one tax year.
You don’t have to worry about all these rules if you’re simply writing a $25 check. But the rules are complicated when making very large charitable contributions. To be sure you’re on sound footing, check with your tax professional.