I have added this article to the latest post set because I am beginning to build a portfolio of stock that I will be donating to my foundation later on, so you are welcome to use this, but it’s really for me.
Q. I own UPS stock. I’ve held these shares since 1986 (before the initial public offering). I want to give some shares to the church I attend. Do I need a broker? I’ve never sold stock before, but I understand the capital gains/loss issue does not exist when you give stock (in the form of cash after it’s sold) to a non-profit organization. – D.C.
A. Wait, wait — don’t sell it! If you sell it, you will create a capital gain and you will have to pay the tax on it. If you’ve owned shares of United Parcel Service (NYSE: UPS) since 1986, the capital gains will be huge! If you let the church sell it, they probably won’t have to pay any taxes on it. Much nicer. Giving stock to a charitable organization is a wonderful way to expand the amount you can afford to donate. You get a tax deduction for the gift, and the church puts it to good – and untaxed – use.
This is the season for giving, and I suspect that a lot of us will be feeling more generous than usual this year. The needs are so great. I hope that everyone reading this article will take a moment to check out our five unique and very cost-efficient charities.
Charitable giving used to be simple. Donate money, stock, old shoes, whatever, and deduct the value of the goods from your taxes. Those days are gone, but donating stock to charity is still a good idea and one that rewards you (after you jump through the appropriate hoops) with a nice tax deduction.
A donation of stock is a contribution of property in the eyes of the IRS. When you donate property, you can deduct the “fair market value,” which with stock (as opposed to that run-down heap in your driveway) is easily ascertained. Well, since this is the IRS, it’s not easy, but it’s doable. You just look up the highest and lowest trading price for UPS on the day you made the transfer and average them. (Hint: Make sure you do the transfer on a market trading day.) Multiply the average share price by the number of shares you donated, and that’s your fair market value. (For a real laugh, see IRS Publication 561, “Determining the Value of Donated Property,” for the formulas to use when the day of your donation isn’t a market trading day.)
Since you have held your stock more than one year, you can deduct the full amount (subject to limits discussed later). Donating stock that’s been held for less than a year isn’t as nice a deal. You can generally deduct only what you paid for the stock unless you pay the taxes on any capital gains.
The mechanics of the donation aren’t difficult. If you actually have in your possession the stock certificates in the correct denominations for the number of shares you wish to donate, you won’t need a broker. You can simply fill in the form on the back of the stock certificate and make it over to your church. The church can take the stock to a broker and sell it, but I suspect they won’t mind the trouble.
If your shares are held in a brokerage account, you can have the broker issue a stock certificate for the number of shares you intend to donate in your name and make it over to the church, or you can ask your broker for assistance in the transfer. (It might be a bit late to order up a stock certificate if you want the deduction for this year.)
Now we come to those limits on how much you can deduct. First, remember that you will have to itemize your deductions to get the full effect. Then, if you are donating a lot of shares, you could run into the limits on charitable giving. They are complicated. Sigh. Essentially your deduction can’t be higher than 30% of your adjusted gross income, unless you pay the capital gains taxes on the sale. (In your case, that could be disastrous!) You can deduct an amount equal to 50% of your income if you pay the capital gains tax, but it’s hard to imagine how that could work out to your benefit.
If you do run up against the limits, there is a silver lining. Anything that you can’t deduct this year can be carried forward for up to five years, so you can keep deducting until you use it up or run out of time. If the tax deduction is important and the amount is large in relation to your income, you might want to contribute some now and some in a later year. No matter what, you should read Publication 526 very, very carefully.
I’m afraid that this time I will have to refer readers to the IRS website which is a pretty good resource if you don’t mind scrolling through a list of hundreds of forms and publications to find what you need .
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