Charitable gifts of appreciated assets

What are the benefits of appreciated assets?

1. Tax benefits
When donating appreciated assets such as stock shares to a qualifying charity, the donor generally can claim a federal income tax deduction (up to IRS limits) equal to the full fair market value of the securities at the time of the gift. Because the appreciated assets are going to a qualified charity, the donor will not realize any capital gains at the time of the gift, therefore potentially avoiding capital gains taxes on the appreciation of these assets. That federal rate can be as high as 23.8%, which can significantly eat into the charitable gift.

2. More to give
By eliminating the long-term capital gains tax, donors can essentially donate more than they otherwise could, because they are not paying the taxes realized on the sale of the asset. Plus, a tax-exempt charity won’t have to pay capital gains tax when it sells the securities donated. This is truly a win-win situation.

How it works

Consider this hypothetical example: John and Sue, a married couple, have taxable income of $520,000 and file a joint return. They own shares worth $60,000—double the $30,000 purchase price. John and Sue want to use the shares to make a sizable donation to their favorite charity.

They have 2 choices:

  • Sell the securities, then donate the cash.
  • Donate the appreciated securities directly to their favorite charity.

The table below shows the potential tax benefit of donating long-term securities that have increased in value, rather than selling the shares and donating the proceeds.

Potential tax benefit of donating long-term securities

  Sell securities and donate the proceeds Donate the securities directly to charity
Fair market value of securities: $60,000
Long-term capital gains tax and Medicare surtax (20% + 3.8%): ($60,000 – $30,000) × 23.8% 0
Charitable contribution/Your charitable deduction: $60,000
Value of charitable deduction: Charitable contribution × 37% marginal federal tax rate* $22,200
* This is a hypothetical example for illustrative purposes only. State and local taxes and the federal alternative minimum tax are not taken into account. Please consult your tax advisor regarding your specific legal and tax situation. Assumes that all realized gains are subject to the maximum federal long-term capital gains tax rate of 20% and the Medicare surtax of 3.8%.

Rules you need to know

To take advantage of this strategy under current law, taxpayers must itemize their deduction on their federal income tax return, and must have held the appreciated assets for more than a year at the time of the gift. If the shares were held for one year or less, they're considered a short-term holding, and the deduction would be limited to the cost basis of the securities ($30,000 in the example on the previous page).

  Public charity or donor-advised fund Private foundation
Cash: 60% of AGI 30% of AGI
Long-term appreciated securities: 30% of AGI 20% of AGI

The amount for the donation of long-term appreciated securities in the current year is capped at 30% of adjusted gross income (AGI) if the securities are given to a public charity or an operating private foundation (a non-publicly supported organization that dedicates most of its earnings to the active pursuit of its tax-exempt purposes). The cap drops to 20% of AGI if the securities are given to a private foundation that doesn't quality as "operating" based on the IRS's criteria. The good news is that under current law, any unused deductions can be carried forward for the next 5 years.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

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