This is the time of year when we gather information to prepare our tax returns. Many individuals are able to deduct gifts to charity. One of the best gifts you can give to your church or other charity is stock or other marketable security that has increased in value since you purchased or inherited it. There are two very important rules to getting the most out of your deduction, however.
The first one has to do with the charitable deduction you are allowed to receive. If you have held the security for at least one year and one day, you are allowed to deduct the fair market value as of the date of the gift. This applies even if you paid much less for it. Otherwise, you are only allowed to deduct what you paid. If you have inherited securities that you want to contribute, the same rules apply, with the date of ownership and the calculated value being determined as of the decedent’s date of death.
The second rule is to transfer the ownership of the security to the charity and let the charity sell it. Otherwise, if you sell it first, you will be responsible for the capital gains tax. However, if the security is worth less than what you paid for it, your best move would be to sell it, report the capital loss on your tax return, and give the proceeds of the sale to the charity.
Sometimes a person may want to set aside an asset for charitable giving, but they are not ready to make the entire gift to a charity at one time, or they haven’t decided what charity they want to benefit. One reason this could happen is if the security has increased in value, and there is a chance that it will decrease in value before the intended gift date. In this case, transferring the asset to a Donor Advised Fund (DAF) is a great way to manage that gift. DAFs allow an individual to place assets in an account managed by a separate organization, then “advise” the organization at a later date on what charity they want to benefit and how much that charity should receive from their account. The donor is able to receive a charitable deduction on the date of the gift, using the rules previously discussed.
The organization holding the funds has the final say on where the funds will go, so be sure to use an organization that has the same values you do. The Baptist Foundation manages DAFs and is available to assist you with questions you may have regarding this type of gift. Giving this type of asset is a wonderful way to bless others with something you have been blessed with.
— For more information call 803-227-6198. [Per IRS Circular 230, Federal tax advice contained in this communication is not intended, nor can be used, for the purpose of (i) avoiding penalties under the IRC or (ii) promoting, marketing, or recommending any transaction or matter addressed herein.]