Donating Stock – Part 1
Why should donors consider donating stock to their church?
The Stewardship Commission would like to provide you with information covering the benefits and mechanics of donating stock to a church.
Topics that will be covered include:
First we will cover the following question: Why should donors consider donating stock to their church?
How donating stock benefits the donor
Donation of stock offers the donor two important tax benefits:
- A charitable donation deduction equal to the original cost plus any appreciation in value
- No tax liability on the appreciated value
How donating stock benefits the church
Donation of stock also offers the church an important benefit:
- The church will not owe any capital gains tax when it sells the donated stock. This means the entire donation (less a small commission) can be immediately used by the church.
Example: Bob purchased 100 shares of ABC corporation at a cost of $1,000 in 1997. In 2001, he donates these shares to his church when their value is $3000. Subject to the limitations that will be covered in the December newsletter, Donating Stock – Part 2, Bob would be able to deduct the full $3,000 market value AND he would not have to pay any capital gains taxes on the $2,000 of appreciation.
In Part 2 we will look at the question: What limitations apply to stock donations?
Donating Stock – Part 2
What limitations apply to stock donations?
In the previous section we discussed: Why donors should consider donating stock to their church?
Now let’s look at the question: What limitations apply to stock donations?
Let’s revisit the example from Part 1 (Why donors should consider donating stock to their church?):
Example: Bob purchased 100 shares of ABC corporation at a cost of $1,000 in 1997. In 2001, he donates these shares to his church when their value is $3000. Subject to the limitations that will be discussed in this article, Bob would be able to deduct the full $3,000 market value AND he would not have to pay any capital gains taxes on the $2,000 of appreciation.
This example needs to be broken down into two scenarios to properly to see the benefits to the donor and the church:
- Donation of shares held by the donor for more than one yearIn this scenario, the donor would be able to deduct the full $3,000 market value AND would not have to pay any capital gains taxes on the $2,000 of appreciation.Donated stock that was held for more than one year is considered “long-term capital gain property”. This means that the amount of the original purchase and the full amount of appreciation can be deducted by the donor.
- Donation of shares held by the donor for less than one yearIn this scenario, there are limitations that apply to a donation of stock where the stock was held for less than one year.Donated stock that was held for less than one year is considered “ordinary income property” or “short-term capital gain property”. This means that only the amount of the original purchase (i.e. cost basis which includes commission) can be deducted by the donor.
Let’s revisit our example applying this limitation known as the one-year rule:
Example: Bob purchased 100 shares of ABC corporation at a cost of $1,000 in 1997. Eight months later, he donates these shares to his church when their value is $3000. Bob would be able to deduct the original cost of $1000 AND he would not have to pay any ordinary income taxes on the $2,000 of appreciation.
How donating stock benefits the donor
Let’s look at the benefits to the donor in donating stock in both scenarios:
1. Donation of shares held by the donor for more than one year
Donation of stock in this scenario offers the donor two important tax benefits:
- A charitable donation deduction equal to the original cost plus any appreciation in value
- No tax liability on the appreciated value
2. Donation of shares held by the donor for less than one year
Donation of stock in this scenario also offers two tax benefits:
- A charitable donation deduction equal to the original cost
- No tax liability on the appreciated value
Both scenarios clearly offer tax benefits to the donor, but the donor can obtain a higher level of tax benefits by donating shares held more than one year.
How donating stock benefits the church
Donation of stock also offers the church an important benefit and this benefit is the same for both scenarios discussed above:
- The church will not owe any capital gains tax when it sells the donated stock. This means the entire donation (less a small commission) can be immediately used by the church.
In Part 3 we will look at the question: What about selling a stock and donating the proceeds?
Donating Stock – Part 3
What about selling stock and donating the proceeds?
Over the next several months, the Stewardship Commission would like to provide you with information covering the benefits and mechanics of donating stock to a church.
In the previous section we discussed: What limitations apply to stock donations?
Now let’s look at the following question: What about selling stock and donating the proceeds?
Let’s look at an example:
Example: Bob purchased 100 shares of ABC corporation at a cost of $1,000 in 1997. In 2001, he sells these shares for $3,000.
Let’s compare donating these shares versus selling them: (assuming a 28% tax bracket for the donor)
| Donating Shares | Selling Shares | |
|---|---|---|
| Charitable contribution | $3,000 | $3,000 |
| Tax rate | 28% | 28% |
| Tax benefit of gifts | $840 | $840 |
| Tax on gain | $0 | $560 |
| Net benefit to donor | $840 | $280 |
How donating stock benefits the donor
Let’s look at the benefits to the donor in both scenarios:
1. Donating the shares (shares were held by the donor for more than one year)Donation of the stock in this scenario offers the donor two important tax benefits:
- A charitable donation deduction equal to the original cost plus any appreciation in value ($3,000)
- No tax liability on the appreciated value ($560)
2. Selling the shares and donating the proceedsDonation of the proceeds has the following benefits and implications:
- A charitable donation deduction equal to the amount donated ($3,000)
- However, tax liability IS owed on the appreciated value ($560)
Both scenarios clearly offer tax benefits to the donor, but the donor can obtain a higher level of tax benefits by donating shares that have appreciated in value instead of selling them and donating the proceeds.
How donating stock and/or stock proceeds benefits the church
Donation of stock offers the church an important benefit:
- The church will not owe any capital gains tax when it sells the donated stock. This means the entire donation (less a small commission) can be immediately used by the church.
Donation of stock proceeds also offers the church an important benefit:
- The church will not owe any tax on the donated proceeds. This means the entire donation can be immediately used by the church.
In Part 4 we will look at the question: What about stock that has declined in value?
Donating Stock – Part 4
What about stock that has declined in value?
In the previous section we discussed: What about selling stock and donating the proceeds?
Now let’s look at the question: What about stock that has declined in value?
Let’s look at an example:
Example: Bob purchased 100 shares of ABC corporation at a cost of $1,000 in 1997. In 2001, he sells these shares for $700.
Let’s compare donating these shares versus selling them: (assuming a 28% tax bracket for the donor)
| Donating Shares | Selling Shares | |
|---|---|---|
| Charitable contribution | $700 | $700 |
| Tax rate | 28% | 28% |
| Tax benefit of gifts | $196 | $196 |
| *Potential tax benefit of loss | $0 | $84 |
| Net benefit to donor *assuming no other tax related scenario prevents the donor from claiming a realized loss |
$196 | $280 |
How donating stock and/or stock proceeds benefits the donor
Let’s look at the benefits to the donor in both scenarios:
1. Donating the shares (shares were held by the donor for more than one year)Donation of the stock in this scenario offers the donor an important tax benefit:
- A charitable donation deduction equal to the fair market value ($700)
2. Selling the shares and donating the proceeds (shares were held by the donor for more than one year)Donation of the proceeds has the following donor benefits:
- A charitable donation deduction equal to the amount donated ($700)
- A realized loss of $300 that will offset any other capital gain or will reduce your taxable income if there were no capital gains
Both scenarios clearly offer tax benefits to the donor, but in the specific case where the fair market value is below the donor’s original cost, the donor can obtain a higher level of tax benefits by selling the shares that have declined in value and donating the proceeds.
How donating stock and/or stock proceeds benefits the church
Donation of stock offers the church an important benefit:
- The church will not owe any capital gains tax when it sells the donated stock. This means the entire donation (less a small commission) can be immediately used by the church.
Donation of stock proceeds also offers the church an important benefit:
- The church will not owe any tax on the donated proceeds. This means the entire donation can be immediately used by the church.
In Part 5 we will look at the question: How does a donor determine the value of a donated stock?
Donating Stock – Part 5
How does a donor determine the value of a donated stock?
In the previous section we discussed: What about stock that has declined in value?
Now let’s look at the question: How does a donor determine the value of a donated stock?
As we have seen from parts 1-4 of this series, a donor who contributes a publicly traded stock to a church can claim a charitable deduction in the amount of the fair market value of the donated shares (subject to the limitations discussed in part 2 of this series).
The fair market value of a stock donation is determined as follows:
- Determining the “mean price” of the donated shares by adding the high and low values of the stock on the day of the gift and diving by 2
- Multiplying the “mean price” times the number of donated shares
Let’s look at an example:
Example: Bob purchased 100 shares of ABC corporation at a cost of $1,000 in 1997 ($10 per share). On March 7th 2001, he donates these shares to his church. The high for the day was $34.37 and the low was $31.75.
Let’s determine the fair market value:
- ($34.37 + $31.75) / 2 = $33.06
- $33.06 * 100 shares = $3,306
The fair market value is $3,306.
How donating stock benefits the donor
Let’s look at the benefits to the donor:
- A charitable donation deduction equal to the original cost ($1,000) plus any appreciation in value ($2,306)
- No tax liability is owed on the appreciated value ($2,306)
How donating stock benefits the church
Donation of stock offers the church an important benefit:
- The church will not owe any capital gains tax when it sells the donated stock. This means the entire donation (less a small commission) can be immediately used by the church.
If you would like to donate a gift a stock to HEFC please contact us at (804) 730-9512.