Contributing Bonds and Stocks to Charity to Avoid Capital Gains

Once your bonds have been appreciated you are advised to transfer these bonds to a worthy cause like charity. By doing this you will see a significance on your tax deduction because of this contribution. And you would be able to avoid the capital gains tax which would be due on the sale of the stock.

If you are going to cash in your stocks and bonds you should know that when receiving the funds from your brokerage house there will be a tax imposed and this tax is normally 15% if you have had the stock for at least a year. If you did not hold this particular stock for the entire year you will end up paying a rate of about somewhere between 25 and 30%. When you are complete with the sales of your bonds and have gotten the proceeds you now can contribute the necessary funds to the various charitable organizations.

And in this event both you and the charity organization will benefit from this as if the bonds are transferred straight from the account of your brokerage to the account of the charities brokerage. Because you will not come in contact with these funds there will be no capital gains taxes and also no income tax. An example of this is that you bought 500 shares at CarMax for over a year at $9 dollars per share, for a total cost of $4,500 dollars. This present day that same stock is worth $20 dollars per share or a total of $10,000 dollars.

Avoid the Tax on Capital Gains by Donating the Property to a Charity

A taxpayer can avoid the tax on long-term capital gains by donating the property to a recognized charity. If the sale of the property would result in a long-term capital gain, but the taxpayer donates the property to charity, the taxpayer avoids the tax on the long-term capital gain and also receives a charitable contribution deduction equal to the fair market value of the property at the time of the donation.

A long-term capital gain occurs when the taxpayer sells or exchanges a capital asset that the taxpayer has held for more than one year for an amount that exceeds the asset's adjusted basis (usually cost). Most long-term capital gains are taxed at a maximum rate of 15 percent. This rate is much lower than the maximum 35-percent rate that applies to ordinary income.

However, a taxpayer can avoid even the 15-percent tax rate on a long-term capital gain by contributing the property to a recognized charity. In such a case, the taxpayer does not have to recognize the gain. In addition, the taxpayer may deduct the fair market value of the property as a charitable contribution.

For example, assume that a taxpayer bought land for investment two years ago at a cost of $6,000. The land is now worth $16,000. The taxpayer donates the land to a recognized charity. The taxpayer does not have to recognize the $10,000 ($16,000 - $6,000) long-term capital gain. In addition, the taxpayer may deduct $16,000 as a charitable contribution.

The deduction for charitable contributions of an individual is generally limited to 50 percent of the taxpayer's adjusted gross income (AGI). However, for contributions of long-term capital gain property, the limit is 30 percent of the taxpayer's AGI unless the taxpayer elects to deduct only the adjusted basis of the property rather than its fair market value.

The taxpayer may carry over any charitable contributions that exceed the annual limit to the next five tax years. The current year's contributions are deducted before any contributions carried over from a prior year.

If the property is tangible personal property, such as a work of art the taxpayer had purchased, the charitable contribution deduction is limited to the taxpayer's adjusted basis in the property. The taxpayer may not deduct the fair market value of such property if it exceeds the property's adjusted basis. In addition, the deduction for contributions of property to private nonoperating foundations is limited to the adjusted basis of the property.

If the property is ordinary income property or property the sale of which would result in a short-term capital gain, the deduction is also limited to the adjusted basis in the property. However, the taxpayer would not have to recognize the appreciation as a gain.

Taxpayers should not donate property to charity on which they would realize a loss if they sold the property. The deduction for the charitable contribution would be limited to the fair market value of the property, and the taxpayer would not recognize the loss. The taxpayer would achieve a more favorable tax result by selling the property to realize the loss and contributing the cash proceeds to the charity. Of course, losses on the sale of personal use assets such as clothing are not recognized.

While the deduction of net capital losses of an individual or married couple is limited to $3,000 a year, the taxpayer may carry over any unused net capital losses to future tax years indefinitely.

The ability to contribute long-term capital gain property to a charity to avoid the tax on the long-term capital gain while deducting the fair market value of the property as a charitable contribution is a great tax planning strategy. Taxpayers who want to contribute to charity should seriously consider using this strategy.

However, the tax law has numerous exceptions and limitations. Therefore, a taxpayer should consult a competent tax professional before donating any significant amounts of property to a charity.