Investors who own stock and other securities may also be donors, giving a portion of the money they earn from investing to charitable causes or organizations. While one donation option involves selling stock and giving a cash gift, many groups also accept shares of stock directly. When an investor gifts shares of stock by signing them over, he can also gain valuable tax benefits for himself.
As with any type of charitable donation, a stock gift makes the donor eligible for an income tax deduction. This only applies to taxpayers who itemize their deductions. However, it allows taxpayers to deduct the full fair market value of the gifts, up to 30 percent of their adjusted gross incomes. Donors who claim the cost basis of stock gifts instead of the fair market values can deduct the full value up to 50 percent of their adjusted gross incomes. In each case, this deduction means a lower tax liability for the donor.
Avoiding Capital Gains
Another tax advantage of gifting stock, which does not apply to other types of donations, such as cash, has to do with the capital gains tax. This is the tax that investors must pay when they sell shares of stock for more than they cost to buy. The investor's profit, less fees, is known as a capital gain, and it adds to the investor's taxable income. Gifting stock eliminates capital gains for the investor. Instead the recipient benefits from the value that the stock has gained since its purchase.
Just as donating stock that has gained value and would result in capital gains if sold provides tax advantages, giving stock that has decreased in value since you bought it can have the opposite effect. This is because when you sell stock at a loss, you can claim a capital loss to reduce your capital gains from other investment profits. Gifting this stock robs you of the capital loss and doesn't pass its value on to the recipient. Instead, you can sell stock for a loss and donate the cash from the sale, receiving a deduction for the money you give and creating a loss that can further reduce your tax liability.
Gifting stock also speeds up the process of making a charitable contribution, which can have its own tax benefits. The time that it takes to initiate a stock sale order with a broker, receive a check, deposit it into a bank account and, after waiting for the funds to clear, write a new check to deliver as a donation may push a gift into the next tax year. This prevents it from offsetting income and other tax liabilities for the current tax year, while a stock gift is ready to write off as soon as the recipient takes possession of the stock.
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