In addition to giving retirement plan bequests to charity, donors are often advised to give away stock or real estate that has appreciated in value. This has to do with capital gains taxes and the fact that you would have to pay tax on capital gain if you were to sell the asset, but the charity can do so tax-free. Let’s look at an example:

If in order to make a gift to charity you were to sell shares of stock for $1,000 that you had purchased for $200, the gain would be $800. The tax (depending on your marginal federal and state tax rates) would be in the range of $200. If you gave the charity the $1,000 of proceeds, your tax savings from taking a charitable deduction on your taxes might or might not offset the $200 depending on whether you itemize, your state tax rates, and your tax bracket. For purposes of this example, let’s assume that your marginal tax rate (federal and state combined) is 20%. If, instead of selling the stock and making a gift of the proceeds, you had given the charity the stock itself without selling it first, you would still have a $1,000 deduction without having to pay any tax on capital gains. With your $200 in tax savings, the net cost of the gift to you would be $800 instead of $1,000. You may find this arithmetic easier to absorb if set out as follows:

                                                             Gift of Stock Proceeds                                   Gift of Stock

Stock Value                                        $1,000                                                                  $1,000

Tax on Capital Gains                        +   200                                                                 +        0

Out-of-pocket cost                            $1,200                                                                  $1,000

Charitable Tax Deduction             – $200                                                                – $200

Ultimate Cost                                  $1,000                                                                   $   800

 

These calculations assume that the taxpayer itemizes. If he doesn’t, the same calculation applies except that he doesn’t get the benefit of the tax deduction and the out-of-pocket cost is $200 higher under both approaches, as follows:

                                                             Gift of Stock Proceeds                                   Gift of Stock

Stock Value                                        $1,000                                                                  $1,000

Tax on Capital Gains                        +   200                                                                 +        0

 

Cost to Taxpayer                              $1,200                                                                  $1,000

Of course, the benefit of gifting appreciated assets increases with larger gifts. If our example were of a $1 million parcel of real estate rather than a $1,000 stock investment, the tax savings could easily be $200,000 (or more given the higher tax bracket of people making such large gifts). Some taxpayers making larger gifts do so through charitable annuities and charitable trusts that permit them to continue to receive some income and reap some of the benefit of the investment of the proceeds of the tax-free sale by the charity.

The tax benefit of avoiding the tax on capital gain on the liquidation of appreciated assets does not exist for bequests at death because capital gains disappear at death through an adjustment (or “step-up”) of basis. With no one paying taxes on capital gains, there’s no benefit to charities’ non-taxpaying status. So, charitable bequests at death are usually made in dollar or percentage amounts, rather than giving specific appreciated property.

Related Articles:

The Benefits of Making Charitable Gifts and Bequests from Your IRA

Charitable Remainder Trusts

The Tax Benefits of Making Charitable Gifts While Alive

How General or Specific Should You Make Your Bequest to Charity?

Having Your Cake and Eating It Too: Charitable Annuities