Hi voop,
what are the tax advantages of giving $5000 of stock versus $5000 in cash to worthy causes?
Depends on its holding period, your treatment of its appreciated value, the type of recipient charities, among others. See the rules below.
Good luck, voop. PM me if you have further questions.
di
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Giving Property That Has Increased in Value
If you contribute property with a fair market value that is more than your basis in it, you may have to reduce the fair market value by the amount of appreciation (increase in value) when you figure your deduction.
Your basis in property is generally what you paid for it. If you need more information about basis, get Publication 551.
Different rules apply to figuring your deduction, depending on whether the property is:
Ordinary income property, OR
Capital gain property.
ORDINARY INCOME PROPERTY
Property is ordinary income property if its sale at fair market value on the date it was contributed would have resulted in ordinary income or in short-term capital gain. Examples of ordinary income property are inventory, works of art created by the donor, manuscripts prepared by the donor, and capital assets (defined later, under Capital Gain Property) held 1 year or less.
Property used in a trade or business
Property used in a trade or business is considered ordinary income property to the extent of any gain that would have been treated as ordinary income because of depreciation had the property been sold at its fair market value at the time of contribution. See Chapter 4 of Publication 544, Sales and Other Dispositions of Assets, for the kinds of property to which this rule applies.
Amount of deduction
The amount you can deduct for a contribution of ordinary income property is its fair market value LESS the amount that would be ordinary income or short-term capital gain if you sold the property for its fair market value. Generally, this rule limits the deduction to your basis in the property.
Example. You donate stock that you held for 5 months to your church. The fair market value of the stock on the day you donate it is $1,000, but you paid only $800 (your basis). Because the $200 of appreciation would be short-term capital gain if you sold the stock, your deduction is limited to $800 (fair market value less the appreciation).
Exception
Do not reduce your charitable contribution if you include the ordinary or capital gain income in your gross income in the same year as the contribution. See Ordinary or capital gain income included in gross income under Capital Gain Property later, if you need more information.
CAPITAL GAIN PROPERTY
Property is capital gain property if its sale at fair market value on the date of the contribution would have resulted in long-term capital gain. Capital gain property includes capital assets held more than 1 year.
Capital assets. Capital assets include most items of property that you own and use for personal purposes or investment. Examples of capital assets are stocks, bonds, jewelry, coin or stamp collections, and cars or furniture used for personal purposes.
For purposes of figuring your charitable contribution, capital assets also include certain real property and depreciable property used in your trade or business and, generally, held more than 1 year. (You may have to treat this property as partly ordinary income property and partly capital gain property.)
Real property. Real property is land and generally anything that is built on, growing on, or attached to land.
Depreciable property. Depreciable property is property used in business or held for the production of income and for which a depreciation deduction is allowed.
For more information about what is a capital asset, see chapter 2 of Publication 544.
Amount of deduction - general rule
When figuring your deduction for a gift of capital gain property, you usually can use the fair market value of the gift.
Exceptions
However, in certain situations, you must reduce the fair market value by any amount that would have been long-term capital gain if you had sold the property for its fair market value. Generally, this means reducing the fair market value TO the property's cost or other basis. You must do this IF:
The property (other than qualified appreciated stock) is contributed to certain private nonoperating foundations,
The contributed property is tangible personal property that is put to an unrelated use by the charity, or
You choose the 50% limit instead of the 30% limit, discussed later.
Contributions to private nonoperating foundations.
The reduced deduction applies to contributions to all private nonoperating foundations other than those qualifying for the 50% limit, discussed later.
A special rule may apply to contributions of qualified appreciated stock. Qualified appreciated stock is generally any stock of a corporation that is capital gain property and for which market quotations are readily available on an established securities market on the day of the contribution. See Internal Revenue Code section 170(e)(5) if you contributed this type of stock.
Contributions of tangible personal property. The term tangible personal property means any property, other than land or buildings, that can be seen or touched. It includes furniture, books, jewelry, paintings, and cars.
The term unrelated use means a use that is unrelated to the exempt purpose or function of the charitable organization. For a governmental unit, it means the use of the contributed property for other than exclusively public purposes.
Example. If a painting contributed to an educational institution is used by that organization for educational purposes by being placed in its library for display and study by art students, the use is not an unrelated use. But if the painting is sold and the proceeds are used by the organization for educational purposes, the use is an unrelated use.
Ordinary or capital gain income included in gross income. You do not reduce your charitable contribution if you include the ordinary or capital gain income in your gross income in the same year as the contribution. This may happen when you transfer installment or discount obligations or when you assign income to a charitable organization. If you contribute an obligation received in a sale of property that is reported under the installment method, see Publication 537, Installment Sales.
Example. You donate an installment note to a qualified organization. The note has a fair market value of $10,000 and a basis to you of $7,000. As a result of the donation, you have a short-term capital gain of $3,000 ($10,000 - $7,000), which you include in your income for the year. Your charitable contribution is $10,000.
irs.ustreas.gov
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"Operational Test
1) To satisfy the operational test, an organization must be operated exclusively for one or more of the following purposes:
religious
charitable
scientific
testing for public safety
literary
educational
fostering national or international sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment)
prevention of cruelty to children or animals
2) Reg. 1.501(c)(3)-1(c)(1) provide that an organization is operated exclusively for charitable purposes only if it engages primarily in activities that accomplish those purposes in (1) above. It is not so operated if more than an insubstantial part of its activities do not further those purposes."
irs.ustreas.gov |
