| CHARITABLE GIFTS OF SECURITIES |
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While driving home from the office recently, the local public ratio station made a pitch for their donors to give securities or other property to the station. Normally this advice makes good sense, but I believe deserves a little more consideration in these difficult economic times.
The reasons a gift of securities makes so much sense is that the donor has a potential income tax deduction for the fair market value of the security donated—any appreciation in the security goes untaxed. When you contrast this with the alternative of selling the security, paying the capital gains tax, and donating the proceeds to the charity, it is clear that both the taxpayer and the charity benefits, but this is a double-edged sword. If the security has declined in value and represents an unrealized loss, the taxpayer still has a potential tax deduction for the fair market value of the security, but receives no tax benefit for the loss in value. Therefore, a rule of thumb in considering a Charitable contribution of securities is:
If the security represents an unrealized gain in your portfolio and the security has been held for more than one year, it makes very good sense to give the security to charity, avoiding a taxable capital gain.
If the security represents an unrealized loss in your portfolio or if the security has been held for one year or less, you should consider selling the security to generate a tax loss, and then donate the proceeds to charity.
In realizing the a tax loss by selling the security, remember that your ability to obtain a tax benefit for a capital losses may be limited, as capital losses may only offset capital gains plus $3,000 of ordinary income each year, with the unused balance being carried forward as a capital loss in the next and future years. The only downside of this strategy is the transaction cost of making the sale.
One final note on gifts of securities—the value of the gift is the average of the high and low value of the stock on the date of the gift, and not the published closing price that is normally used in valuing a securities portfolio.