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Submitted by:

Howard M. Hujsa, Esq.

Board Certified Wills, Trusts, & Estates Lawyer with Cummings & Lockwood, LLC

In this time of economic turmoil it can be very useful to re-consider the conventional wisdom about how we make charitable donations. Although we are eager to benefit our favorite charities, it is vital to make choices based, in part, on income tax considerations. The most common form of a charitable donation is a cash gift which has the benefit of being relatively simple: all you have to do is write the check. However, if you have appreciated stock that you have owned for longer than 1 year (or that you inherited) it often makes more economic sense to donate the appreciated stock rather than giving cash. Why? By donating appreciated stock, you may deduct the full value of the stock and never pay a capital gains tax on the appreciation. Donors often make the mistake of selling appreciated stock and then donating the proceeds. Selling the appreciated stock first may mean that both parties (the donor and the charity) lose: 15% of the appreciation must be paid to the IRS, not the charity. The lesson: if you have appreciated stock that you have owned for more than 1 year, consider donating the stock, rather than cash, to charity. Even in a declining market, be careful to remember what appreciated stock is stock that is worth more than what you paid for it.

However, with the recent market contraction, this conventional wisdom may need to change, depending upon what stock you have. Unlike appreciated stock, it may not make economic sense to donate depreciated stock, i.e., stock that is worth less than what you paid for it. Rather, it may make more economic sense to sell depreciated stock and then donate the proceeds. Why? A donation of depreciated stock allows you to deduct only the stock’s value, not what you paid for the stock. However, by selling the depreciated stock you have the opportunity to generate a tax (capital) loss that may reduce your income tax, such as capital gains generated by a hedge fund or mutual fund trying to protect against the falling stock market. If, instead, you donate the depreciated stock to charity you may “waste” your tax loss. The lesson: if you have depreciated stock, you should consider selling the depreciated stock and donate the cash proceeds, rather than the stock itself.

These are trying times. Consult with your tax advisor to ensure that both you and your charity of choice enjoy the economic benefits available to you under our tax laws.