BERKELEY HEIGHTS, N.J. (TheStreet) - As the year winds down, many affluent couples reach for their checkbook and send a cash contribution to a favorite charity, but investors should put down their checkbooks and review their investment portfolios, looking instead for highly appreciated publicly traded securities
Donating securities to a qualified charity fulfills the charitable intent in a highly tax efficient manner. Corporate executives in particular can use this strategy to reduce overexposure to their employer's stock, especially if it is highly appreciated.
There are rules governing donating highly appreciated securities, though. The charity must be a qualified charity under the tax code, for one thing, following rules at irs.gov. The securities must also have been held for a year or more, and the investors' charitable deduction is limited to 30% of their adjusted gross income when donating to a public charity, dropping to 20% of AGI for private charity donations.
If a person is above the AGI thresholds, the excess amount can be carried forward and used in future years, subject to the same AGI limitations.Why is donating highly appreciated securities so tax efficient? The best way to illustrate is by example.
Assume a couple with $1 million in AGI contributes $50,000 in cash to the XYZ charity. They write their check and, when tax time rolls around, get an itemized deduction for their contribution. The tax benefit for their donation is realized at their effective tax rate.