Fairfax, VA (Law Firm Newswire) March 21, 2017 –
Many people consider making gifts to qualified charitable organizations in an effort to lower their possible estate income tax liability while helping a worthwhile cause. Potential donors should be careful to gift only the “right kind” of stock, and not the “wrong kind.”
If a person is making a contribution of stock that was owned for more than one year, the owner’s tax deduction is decided by the stock’s fair market value. Therefore, if the owner donates stock with a low basis that was held for a lengthy period of time, the increase in value is never subject to tax. On the other hand, if the owner donates stock held for one year or less, the owner is required to use the basis, or cost, as the amount contributed.
Respected Vienna, Virginia estate planning attorney Lisa McDevitt says, “Those who are contemplating making donations of stock to charity are recommended to consult an estate planning attorney who will advise them to gift stock with a low basis so that they will incur the lowest tax liability.”
Thus, it is best to donate long-term stock with a low basis and retain stock with a high basis, particularly if it is held for a short amount of time. Consider the following scenarios. An individual purchased Stock A some years ago for $10,000, and it is currently worth $20,000. In addition, the owner acquired Stock B earlier in the year for $15,000, and it is now worth $15,500. If the owner donates Stock B prior to the end of the year, the deduction will be limited to $15,000, which is the owner’s basis in the stock. However, if the owner donates Stock A instead, the deduction will be $20,000, and the owner will never pay tax on the appreciation of $10,000.
If the stock has declined in value, and the owner will benefit from a tax loss by year-end, the owner can sell the stock and then make a donation of the proceeds to charity. The alternative is to donate the stock, and realize a deduction that is limited to the fair market value of the stock.
Lisa Lane McDevitt
2155 Bonaventure Drive
Vienna, VA 22181