Tax Smart Year-End Giving

With year-end near, many people are considering making their annual donations to their favorite charity.  A tax smart way to do this is to gift appreciated assets.This means that the fair market value of the asset is more than the cost basis.  The cost basis is what you paid for an asset.

For example, when you buy a stock, the cost basis is what you paid for the stock assuming any dividends weren't reinvested.  If a stock was inherited, the cost basis is generally the fair market value at the date of death.  If the stock was received as a gift, the basis is the same as the donor's.  This is known as carryover basis.

Some examples of appreciated assets are mutual funds, stocks, and bonds.  There are two reasons it is preferable to give away appreciated property.  First, you may get an income tax deduction for the fair market value of your donation, subject to some limitations.  To get the fair market value as a deduction, the asset needs to have been held by the donor for more than a year.  The deduction for appreciated property is limited to 30% of Adjusted Gross Income ("AGI").  This is lower than the limit on cash donations which is 50% of AGI.  Any amount over this can be carried forward and deducted over the next five years.  Second, when giving away appreciated property, you don't pay capital gains tax on this sale.  By gifting appreciated assets, you avoid paying capital gains taxes and may get an income tax deduction.

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