Stock & Mutual Funds

Donate Stock Tutorial

Advantages of Donating Stocks and Mutual Funds

Many donors choose to make gifts using long-term appreciated stocks and mutual funds due to the attractive tax advantages associated with such gifts.

While Cornerstone can’t give you tax advice, the benefits available to you when making a contribution of stock or mutual funds may include:

• Avoiding federal and state tax on the capital gain on the appreciated securities.
• Receiving an income tax deduction (federal and most states) for the full market value of your gift if you itemize deductions on your tax return and have held the assets one year or longer.
• Making a larger gift at a lower original cost to you.

Before you make a gift of appreciated securities, however, you should consult your financial planner or tax advisor to determine how the potential tax advantages described here apply to your specific situation.

Here’s an example of how it works

Say, for example, you purchased stock that cost you $1,500 several years ago, that is now worth $5,000, and that if sold would result in a capital gain of $3,500. If you donate the stock, the Tax Code permits Cornerstone (as a “Section 501(c)(3)” charitable institution) to sell the stock without having to recognize the capital gain.

If you donate the stock directly to Cornerstone, you will avoid paying federal capital gains tax of $525 ($3,500 x 15% = $525). And let’s assume you live in one of the states that also taxes capital gains. Assuming a 5% state capital gains tax rate*, you would avoid an additional $175 ($3,500 x 5% = $175) in taxes. This results in a total capital gains tax savings of $700.

Let’s further assume you fall in the 28% federal income tax bracket. By itemizing your deductions, you are eligible to take a $5,000 charitable income tax deduction that saves you an additional $1,400 ($5,000 x 28% = $1,400) of federal income tax for the tax year you made the gift. If your state allows you to deduct charitable gifts, you can also save on your state income taxes. Assuming a 5% state income tax rate, this results in an additional savings of $250 ($5,000 x 5% = $250) for you.

In this hypothetical example, by making a stock or mutual fund donation, you are able to make a $5,000 gift that generates a total tax savings of $2,350. A direct contribution of $5,000 in cash would generate an income tax saving of $1,650. And if you were to sell the securities first and then donate what’s left after paying taxes, you would only be able to donate $4,300 ($5000 less $525 + $175), which would generate income tax savings of $1,419 ($1,204 + $215). Donating long-term appreciated securities is clearly the tax-efficient way.

The Table below summarizes the example:

	Sell $5,000 in securities and donate cash proceeds	Donate $5,000 cash	Donate $5,000 in securities
Original Amount	$5,000	$5,000	$5,000
Federal Capital Gains Tax Paid	$525	$0	$0
State Capital Gains Tax Paid	$175	$0	$0
Total Tax Paid	$700	$0	$0
Donation Amount	$4,300	$5,000	$5,000
Charitable Deduction	$4,300	$5,000	$5,000
Federal Capital Gains Tax Saved	$0	$0	$525
State Capital Gains Tax Saved	$0	$0	$175
Federal Income Tax Saved	$1,204	$1,400	$1,400
State Income Tax Saved	$215	$250	$250
Total Tax Saved	$1,419	$1,650	$2,350
After-tax “cost” of a $5,000 donation	$3,581	$3,350	$2,650

* More than 80% of the 50 States levy a tax on capital gains that can be as high as 12%.

Important facts to remember:

• You must itemize your tax return in order to deduct a charitable donation.

• You may not receive the full tax advantages of donating appreciated securities if you are subject to the alternative minimum tax.

• You must have owned the securities for at least one year before donating them, or you will be limited to a deduction of your original purchase cost of the securities.

• You may take a deduction valued up to 30% of your Adjusted Gross Income. If the deduction is greater than 30%, you may carry any unused deduction forward for up to five years into the future until it has been fully used.

• We encourage you to consult your financial planner or tax advisor who can assist you in evaluating the tax advantages available to you when making a donation of appreciated securities.

Specifics:

Gather the Proper Proof Needed to Claim a Charitable Donation of Stock

1. Give the IRS the proper name of the issuer for the stock that you are donating.
2. Indicate whether the stock you are donating represents securities that are commonly traded on the stock exchange or by other over-the-counter means.
3. Offer specific information on the type of securities you are donating.
4. Provide the date of your donation. This will vary and is dependent on whether you are signing the donated securities over or making an electronic transfer through your broker.

Procure the Forms Necessary to Claim Your Charitable Deduction of Stock

1. Indicate your intention to itemize your deductions on IRS Form 1040, under the section “Tax and Credits.”
2. Use Schedule A to itemize your claim of a charitable donation of stock in the Gifts to Charity section.
3. Select Form 8283 to claim your deduction for a non-cash charitable contribution, as indicated on Schedule A.