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How to Maximize Deductions Thru Stock Donations

Recently, we discussed a rather clever strategy of using unsecured loans to avoid having substantial gifts be included in one’s estate and, therefore, be subject to gift tax. In the future, we’d like to continue to highlight and discuss similar clever plans.  Each well discuss ways to reduce tax burdens and maximize an individual’s financial condition. Tax and finance are domains which reward cleverness of this sort. If you’ve got the drive and ability, it’s possible to develop strategies to put yourself in a better financial situation. And between those two necessary things, drive is easily just as important as ability.  Think about it.  The tax code contains literally millions of words, more than even  the Bible! Needless to say, poring over the code requires a great deal of self-motivation. 

In this post, we’re going to discuss another financial strategy to reduce taxes.  It’s the strategy of making a donation of stock. to a qualified charitable organization. in order to receive a charitable deduction. Making donations to charity for the purpose of receiving a tax deduction is hardly a novel concept.  The practice has existed for a long time and has a well-established pedigree in our tax code. However, what not everyone realizes is that donating corporate stock may be an optimal strategy in certain situations. We’re about to go over the mechanics of this strategy in detail and highlight its benefits to taxpayers.   Let’s get started.

Overview of Charitable Contributions 

When a taxpayer chooses to itemize their tax return, they can take a deduction for donations given to certain organizations classified as “charitable organizations.” Those are organizations classified as such under very specific IRS rules. Depending on a taxpayer’s status, a charitable contribution may be both an excellent financial and ethical decision. Taxpayer are able to deduct cash contributions on a one-for-one basis.  That is, a $100 cash donation yields a $100 charitable deduction.  They’re also able to deduct the fair market value of donated property.

The Advantage of Stock Donations

The main tax advantage of donating stock to charity is the deduction the taxpayer receives in return.  It’s an amount equal to the fair market value of the stock, at the time the contribution is made. This means that, if a taxpayer decides to donate substantially appreciated stock, the entire appreciated value is potentially deductible. That’s a tremendous advantage over liquidating the stock and donating the cash proceeds. Why?  Because when our taxpayer converts stock into cash, he or she has pays capital gains taxes on the appreciated value.  That results in less cash ultimately available for contribution as well as a lower charitable deduction.  But making a charitable contribution of appreciated stock allows the taxpayer to both bypass the capital gains taxes and take a deduction equal to the appreciated value.  

Stock Donation Mechanics

Suppose you purchase $500 worth of stock and that stock value later doubles to $1,000. If you cash out, you’d pay tax to the IRS on the capital gains of $500. If you’re in the 15% bracket, you’d pay capital gains taxes of $75 and be left with $925. But, if you donate that same stock to a qualified charity, you can potentially deduct the full $1,000.

Consulting with a tax practitioner becomes extremely important at this juncture.  That’s because for this type of transaction, the IRS has specific rules for determining the value of donated stock. In the case of donated stock, for instance, the IRS defines “fair market value” as the average between the highest and lowest share price on the day of donation. So, if your shares trade at a high price of $105 and a low price of $95 on the day of the contribution,  you’d compute the fair market value as $100 per share. Also, whether the stock is held short-term or long-term is relevant and is yet another consideration. 

New York Tax City Attorneys to Assist With Stock Donations

Clever strategies such as these are just one reason why readers look forward to our blog posts. The New York tax lawyers at Mackay, Caswell & Callahan, P.C., work diligently to master the tax code.  We do it so that our readers and clients can reap the benefits. It’s easy to get lost in the tax code.  So, if you’re planning to made a stock donation for a charitable contribution, or have any other complex tax or business law issue, call us!  With offices in much of New York including Albany, New York City, Rochester and Syracuse, a New York tax attorney is available to get started on your issue right away. We’re always happy to help.

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