Marketable Securities: A Versatile Type of Planned Gift
Tuesday, July 29, 2008
In most cases, a donor can enjoy greater tax benefits from a gift of marketable securities than from a gift of cash. Some of these benefits are described below.
Gifts of marketable securities qualify for charitable income tax deductions based on the value of the stock. The value of the gift is calculated by averaging the high and low of the security price the day the gift was made. If the donor has held the stock for more than one year, the donor may deduct up to 30% of his or her adjusted gross income, and any remainder may be carried forward for up to five years. If the donor has held the stock for less than one year, the donor may deduct up to the cost basis of the securities.
Unlike the donor who makes cash gifts, a donor of marketable securities will avoid paying capital gains tax on the securities contributed. For example, a donor who makes a charitable gift of $10,000 using appreciated securities qualifies for a $10,000 charitable deduction on his/her income tax return. The same donor will avoid the 15% capital gains tax that he/she would have had to pay had the securities been sold instead of contributed.
Sales of securities usually involve a commission as a cost of selling. When a donor contributes securities to the American Technion Society (ATS), the securities are sold for the ATS on a pro bono basis. Hence, neither the donor nor the ATS pays a commission. Moreover, if the securities have decreased in value while in the donor’s possession, the donor can sell the shares before contributing to the ATS and can then offset the loss against other capital gains to reduce capital gains tax.
Gifts of non-cash securities are second only to cash gifts as the most common gift type. For example, while the number of people making non-cash gifts remained about the same in 2004 and 2005, the amount of non-cash gifts rose by about 11%, from $37 billion to $41 billion, according to Barlow T. Mann of the Sharpe Group.
Legislative Update: Preventing Manipulation of Charitable Payments
Proposed regulations related to Internal Revenue Code Sects. 642 and 643 of the federal tax code would ensure that a provision in a trust or estate document or a provision in a local law can expressly control whether a charitable payment is treated as from ordinary income or capital gains. The document or law could, for example, state the asset or income source out of which charitable payments are made. But, according to the proposed regulations, a trust or will or local law that specifies the tax character for example, ordinary income -- of charitable payments will only be respected if the provision has an economic effect independent of tax consequences. Absent a specific provision determining tax character, the amount of income distributed to charitable beneficiaries is treated proportionately to the income of each income class of the trust or estate.
The Internal Revenue Service and Treasury Department state that the proposed regulations enforce the current regulations by providing clarity and guidance.
These regulations prevent manipulating the way charitable payments are treated in order to maximize the tax benefits to the non-charitable beneficiaries.
For a copy of 26 CFR Part 1, published in 34670 Federal Register, Vol. 73, No. 118, June 18, 2008, click on http://www.smartpdf.com/register/2008/Jun/18/34670A.pdf
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