A multimillion-dollar contribution by an individual to a charity is a noteworthy event. National or local press coverage trumpets the donation and accolades spring forth from the general public. What some people do not realize is that usually such a contribution is not being made in cash, but instead with stock that is worth much more than the donor's tax basis.
The gifting of appreciated public securities takes advantage of provisions in the tax code that provide an opportunity for a greater tax benefit than a gift of cash. Although press coverage may not be forthcoming, the same tax savings opportunity is available to the rest of us non-billionaires.
Congress, in its infinite wisdom, enacted as a part of Section 170 of the Internal Revenue Code, the provisions that allow a taxpayer the ability to contribute appreciated public securities to a qualified charity and to receive a tax deduction for the fair market value of the securities given. In addition, no gain on the difference between the securities' cost and fair market value is recognized. Thus, the full fair market value of the shares is available as a deduction and the gain is not taxed.
In a situation where the shares may otherwise have been sold and a cash gift being made to charity during the same relative time period, a taxpayer can save the capital gain taxes on the sale of the shares by contributing them directly to a charity.
For California tax purposes, there is a difference of note. The gain, although not subject to the regular tax, is an add-back that increases the taxable income for alternative minimum tax purposes. Therefore, it is important to consider both the federal and California net tax effect before committing to such a gesture.
There are a few requirements to meet in obtaining the favorable tax treatment. First, the contribution must be made of property that, if sold, results in a long-term capital gain. Also, the securities, as of the date of the contribution, must have market quotations available on an established securities market. Form 8283 is required to report the gift and is included with Form 1040. An additional requirement that applies more specifically to an extremely wealthy donor than the rest of us is that a donor cannot contribute more than 10 percent of the corporation's outstanding shares (measured by value) in any year.
Additional limitations apply to the amount of such deductions as a percentage of a taxpayer's adjusted gross income in any tax year. For contributions of publicly traded securities to a public charity, the limitation is 30 percent of adjusted gross income. For contributions of publicly traded securities to a private foundation, the limitation is 20 percent of adjusted gross income. The portion of the deduction that cannot be utilized in the current year can be carried forward for five years.
The simple advantage of giving shares instead of cash is that no tax is paid on the gain on the shares contributed, even though the deduction is based on the fair market value of the shares given to the charitable organization.
For example, let's say that John Smith has 200 shares of Intel that are worth $15,000 and cost John $5,000. John is considering selling the shares and will reinvest the proceeds. John also makes cash contributions to his church, the United Way, his college and several other charities. John's total contribution needs are nearly $15,000. John can use the Intel shares to fund the gifts and use the cash he would have otherwise used to fund cash contributions for investments. By using shares to fund the gifts, John has avoided a federal capital gains tax of $2,000 (20 percent of the $10,000 gain). John receives a tax deduction of $15,000 for contributing shares the same as if he gave cash.
If you cannot make up your mind on who to give shares to, certain investment companies offer a program where an investor gives shares to a charitable entity it has created and the donor directs the actual disbursement of a cash gift from the fund to a specific charity or charities. The directing of the gifts can be done over several years, so a decision does not need to be made on the final destination of the gift in the same year a deduction is claimed.
For planning purposes, if a share contribution is highly probable, you should plan which particular shares will be given. An investment adviser or broker should be consulted to make sure the items in a portfolio are candidates for gifts and the timing is appropriate to dispose of the investment. Once a security is selected, a review of the basis in the block of shares owned should be undertaken. A gift of the lowest basis shares will allow an individual to give the most appreciation away and avoid the largest tax while limiting the future tax liability on any retained shares.
A tax adviser should also be consulted to confirm that the contribution is consistent with any other tax planning that is underway or being considered. If an individual desires to continue to hold, say, the Intel shares mentioned earlier, a different strategy could be employed. Intel shares (low basis) can be given to charity and an amount of cash equal to the value can be used to purchase new Intel shares. This allows for a higher basis in the Intel shares owned by the individual, since the low basis Intel shares were given to the charity.
Recently, many individuals have realized significant gains on paper relating to holdings in the stock market. This allows many opportunities to maximize charitable giving while lowering one's overall tax liability. When undertaking tax planning, remember there may be a better alternative than just giving cash. Give shares, get a deduction and save taxes. This strategy is used by many and is allowed under the Internal Revenue Code. Consult with your tax and investment advisers and review what opportunities may be available.
Gary R. Johnson is a partner in the tax department at the Los Angeles office of BDO Seidman, LLP. He can be contacted at email@example.com.
Entrepreneur's Notebook is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact James Klein at (213) 743-1759 with feedback and topic suggestions.
For reprint and licensing requests for this article, CLICK HERE.
Stories You May Also Be Interested In
- Entrepreneur's Notebook---Starting a Private Foundation Can Be a Taxing Matter
- CUSTOM CONTENT: How Charity Can Benefit your Family and Society When it’s Time to Sell your Business
- Geffen Gift to UCLA Raising Estate Issues
- Tax Cut’s Effect on Philanthropy Comes Into Focus
- Contributing to Philanthropy
- Corporate Citizenship & Giving Guide: Empower Your Philanthropy Through a Donor Advised Fund
- Chet Currier---Take Advantage of Decline To Shed Weakest Holdings