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Act Fast—Donate Appreciated Securities Before Year-End

December 16, 2015

Looking for some last minute tax savings? Donate appreciated securities before December 31st for a valuable deduction.

One of the best last-minute tax-saving strategies is to give to charity. After all, you can make a donation to a qualified charity as late as December 31 and take a valuable deduction on your 2015 tax return. But before you reach for your checkbook or credit card, consider another option that could provide you with greater tax benefits: appreciated securities.

As long as you’ve held the securities long-term — more than one year — you can deduct their full fair market value. (For donations of short-term appreciated securities, you can deduct only your tax basis, which is typically what you paid for them.) So a $10,000 donation of long-term appreciated securities provides the same $10,000 tax deduction as a $10,000 cash donation.

But donations of appreciated securities have an added benefit: You avoid the capital gains tax you’d pay if you sold the securities. And because the charity is tax-exempt, it can sell the securities without any tax liability.

Let’s go back to our $10,000 example and see how a donation of cash compares to a donation of appreciated securities. If you’re in the 33% tax bracket, the deduction for either donation can save you $3,300 in taxes. And that’s the total tax benefit for the cash donation.

But let’s say your tax basis in the securities is $3,000, so you’d recognize a $7,000 gain if you sold them. At the 15% long-term capital gains rate, your taxes on the gain would be $1,050. So donating appreciated securities would provide you a total tax savings of $4,350. If you’re subject to the 3.8% net investment income tax or the 20% long-term capital gains rate, the donation of securities would provide an even greater tax benefit.

Don’t, however, donate securities that are worth less than what you paid for them. Instead, sell the securities so that you can use the capital loss to offset capital gains you’ve recognized for the year — and up to $3,000 of ordinary income if you have net losses for the year. (Excess losses can be carried forward indefinitely.) Then donate the cash proceeds from the sale to charity.

Finally, keep in mind some limits that apply. First, donations of appreciated securities are subject to lower annual deduction limits than donations of most other assets. The limit is generally 30% of your adjusted gross income (AGI). Deductions for donations in excess of the limit can be carried forward for up to five years.

Also, whether you’re donating cash or appreciated securities, if your AGI exceeds the applicable threshold, your charitable deductions (and certain other deductions) for the year will be reduced by 3% of your AGI amount that exceeds the threshold. For 2015, the thresholds are $309,900 for married taxpayers filing jointly (half that amount for married couples filing separately), $284,050 for heads of households and $258,250 for singles.

If you’re thinking about making some additional charitable donations this year, consider giving from your portfolio rather than your bank account.

Contact us first to make sure that your donation will provide the tax benefit you expect.

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