Consider donating appreciated stock rather than cash if you intend to contribute to a charity, college, or other 501(c)(3) organization. By doing so, you can potentially maximize your tax benefits. When you donate appreciated stock to a qualifying organization, such as a charity, the organization can sell the stock without incurring any capital gains taxes, as they are exempt from such tax.

This strategy stems from the principle that the tax deduction for donating property to charity equals the fair market value of the donated property. When the donated property has appreciated in value (i.e., “gain” property), the donor does not need to recognize the gain on the donated property. These rules allow for a dual benefit: a charitable deduction equal to the fair market value of the stock and avoidance of taxes on the appreciation in its value.

For instance, let’s consider Tim and Tina, who each plan to donate $10,000 to Brown University. They both own $10,000 worth of stock in ABC, Inc., purchased for $2,000 several years ago.

Tim sells his stock and donates the $10,000 in cash. He receives a charitable deduction of $10,000 but must report a capital gain of $8,000 on the stock.

In contrast, Tina donates the stock directly to the university. She also receives a charitable deduction of $10,000 but avoids paying tax on the $8,000 capital gain. The university benefits equally from receiving the stock, which it can sell immediately for its full value of $10,000.

It’s important to note that this strategy is effective only if the stock has been held for more than one year. If not, it would be categorized as “ordinary income property,” limiting the charitable deduction to the stock’s original cost of $2,000.

Similar restrictions apply to other types of property, such as inventory, and donations of long-term capital gain property that is tangible and personal.

Depending on your overall tax situation, utilizing these tax advantages could potentially trigger alternative minimum tax concerns. Therefore, it’s advisable to carefully evaluate your circumstances or consult a tax advisor before proceeding.

Disclaimer: The information provided here is for general informational purposes only and should not be construed as legal or financial advice. Always consult with a qualified tax professional or advisor to discuss your specific situation and obtain advice tailored to your individual needs. The accuracy, completeness, and timeliness of the information cannot be guaranteed, and you should rely on professional guidance when making tax-related decisions.