Donating Securities Such as Stocks in an Option

Kuwama-125x150Some stocks have been soaring in their values recently, and you may be enjoying this development. If you are generous enough to consider donating some of your profits to a good cause of FUTI, such as scholarships for students, here are some tips on tax benefits you may receive by donating appreciated securities directly to FUTI instead of making a cash donation.
If you have owned securities such as stocks, bonds, mutual funds, annuities (401K plan etc.), real estate investment trusts (REIT) for more than a year, and donate them directly to an IRS accredited public charity such as FUTI (Friends of UTokyo, Inc.), you can avoid paying a capital gain tax, and furthermore you can deduct the securities’ fair market value when you file your tax returns. The charity may sell immediately the donated securities or retain them for a possible future gain. In either case, the charity, which is exempt from taxation, can enjoy the full value of your gift. On the other hand, if you choose to sell the securities by yourself and donate cash earned from the proceeds, you will have to pay a capital gain tax. In other words, by donating the appreciated securities directly to FUTI, you will turn, in effect, the amount of the capital gain tax, into an extra income for FUTI, which would not be possible, should you dispose them on your own. The capital gain tax rate in Year 2013 is 15% for a household with income between $72,850 and $450,000, and 20% for a household with income above this bracket.
Example. Suppose that you bought a stock for $600 more than a year ago, which is now worth $1,200. We assume that your household income is $100,000, where the income tax rate is 25% and the capital gain tax rate is 15%.
Case A: You donate the appreciated stock to FUTI.

  • Savings in Federal income tax: $1,200 x 25% = $300
  • Your gift to FUTI: $1,200

Case B: You sell the stock and then make a cash donation to FUTI from the net proceeds after paying the capital gain tax:

  • Capital gain tax you pay: ($1,200-$600) x 15%=$90
  • Your gift to FUTI: $1,200-$90=$1,110
  • Your savings in Federal income tax: $1,110 x 25% =$277.50
  • Your net savings in Federal taxes: $277.50-$90=$187.50.

Thus, the difference in net tax savings will be $300-$187.50=$112.50. The actual difference will be even larger, if we consider the state income taxes and the commission incurred by selling the stock by yourself.
A few caveats. You need to have held the securities for more than a year to be qualified for the above tax benefits. If the stocks have been held for less than a year, you can deduct only the purchase cost. If you donate more than 30% of your adjusted gross income, although unlikely for most donors, the maximum amount of your tax deduction is set at this level. If the securities you consider liquidating have actually lost value since you acquired them, you would be better off by selling them yourself, claim a capital loss in your tax filing, and then make a cash donation from the proceeds.
If you are kindly contemplating non-cash donations, please contact us at
Yuichiro Kuwama, MD
Director and Treasurer, Friends of UTokyo, Inc.

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