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A contribution of appreciated securities can yield two very different results depending on how you donate it. Donating securities directly to a charity to sell is cost- and tax-effective, while selling the securities and gifting
the proceeds may minimize your savings.
The math: Suppose you are a taxpayer with $650,000 of adjusted gross income (AGI) and you wish to contribute to charity. You own appreciated securities with a market value of $150,000 that have appreciated by $126,050 since the purchase date. You have held the securities for more than one year, and long-term capital gains taxes apply. Below are two options for donating the appreciated securities to charity.
Sell securities and donate cash
|Strategy||Sell securities for $150,000 and donate after-tax proceeds of sale to charity in cash.||Donate securities worth $150,000 directly to charity.|
Capital Gains Tax
|Realize $126,050 gain and pay $30,000 in capital gains tax.1Donate remainder ($120,000) to charity.||Pay no capital gains taxes.2|
|Income Tax Deduction||Deduct $120,000 from taxable income and save $44,400 in income tax.3||Deduct $150,000 from taxable income and save $55,500 in income tax.3|
|Outcomes||Charity receives $120,000||Charity receives $150,000|
|Your net tax savings: $14,400||Your net tax savings: $55,500|
1The capital gains tax is calculated by multiplying the $126,050 gain by 23.8%. This figure represents the combined 20% capital gain rate for earners in the top tax bracket and the 3.8% Net Income Investment tax (NIIT).
2A gift is not a realization event by the donor. The charity recognizes the built-in gain when it sells the securities, but it pays no tax because it is exempt.
3This taxpayer is subject to a 37% marginal tax rate due to his or her AGI.
Note: This is a simplified hypothetical situation for illustration purposes only. Please consult a tax advisor before donating appreciated securities.