Benefits

The benefits available to you when making a contribution of stock or mutual funds may include:

• Avoiding federal and state tax on the capital gain;
• Receiving an income tax deduction (federal and most states) for the full market value of the gift if you itemize deductions on your tax return and have held the assets one year or longer;
• Making a larger gift at a lower original cost to you.

An Example of How it Works

If you purchased stock for $1,500 several years ago that’s now worth $5,000, and you sold it for a capital gain of $3,500, you could donate it to VCS, who could then, according to the Tax Code, be permitted (as a “Section 501(c)(3)” charitable institution) to sell the stock without having to recognize the capital gain.

Capital Gains Tax. If you donate the stock directly to VCS, you will avoid paying federal capital gains tax of $525 ($3,500 x 15% = $525). And assuming you live in a state that also taxes capital gains (like AZ), assuming a 5 percent state capital gains tax rate, you would avoid an additional $175 ($3,500 x 5 percent = $175) in taxes. This results in a total capital gains tax savings of $700.

Charitable Donation. Let’s further assume you fall in the 28 percent federal income tax bracket. By itemizing your deductions, you are eligible to take a $5,000 charitable gift tax deduction that saves you an additional $1,400 ($5,000 x 28 percent = $1,400) of federal income tax for the tax year you made the gift. If your state allows you to deduct charitable gifts, you can also save on your state income taxes. Assuming a 5 percent state income tax rate, this results in additional savings of $250 ($5,000 x 5 percent = $250) for you.

In this hypothetical example, by making a stock or mutual fund donation, you are able to make a $5,000 gift that generates a total tax savings of $2,350 (from above, $700 + $1,400 + $250).

By contrast, a direct contribution of $5,000 in cash would generate an income tax saving of $1,650 (from above, $1,400 + $250; does not include the $700). And if you were to sell the securities first and then donate what’s left after paying taxes, you would only be able to donate $4,300 ($5000 less $525, less $175), which would generate income tax savings of $1,419 ($1,204, which is $4,300 x 28%, + $215, which is $4,300 x 5%).

Therefore, donating long-term appreciated securities directly is the most tax-efficient method for making this kind of donation.

The table below summarizes this example:

*More than 80 percent of the 50 States levy a tax on capital gains that can be as high as 12 percent

Important facts to remember:

• You must itemize your tax return in order to deduct a charitable donation.
• You must have owned the securities for at least one year before donating them or you will be limited to a deduction of your original purchase cost of the securities.
• You may take a deduction valued up to 30 percent of your adjusted gross income. If the deduction is greater than 30 percent, you may carry any unused deduction forward for up to five years into the future until it has been fully used.
• We encourage you to consult your financial planner or tax advisor who can assist you in evaluating the tax advantages available to you when making a donation of appreciated securities.

VCS prefers to receive undesignated gifts, allowing for the greatest flexibility in responding to the school’s evolving needs and priorities, but will also accept gifts designated to select purposes.