Appreciated stock, held for more than one year, can be the ideal choice for individuals who want their gifts to make the biggest impact for the lowest possible cost. The secret ingredient: double tax benefits.
This is how it works. Suppose Ann gives MFA 100 shares of a stock she purchased 10 years ago for $1,000. That stock has risen to its current fair market value of $5,000. Today, Ann can deduct the full $5,000 on this year’s income tax return. The $4,000 capital gain is not taxed, even though the gain is quadruple the purchase price. Avoiding capital gains tax and receiving an income tax deduction makes it possible to give stock at the lowest possible after-tax cost.
Which stocks are best to give? The best choices depend on your portfolio, investment goals, and taxes. There are no definite rules for suitable stocks, but there are a few guidelines:
- Stocks must have been held for more than one year to deduct the appreciation.
- Stocks with the greatest amount of appreciation provide the most leverage for the untaxed gain.
- Investors who follow set portfolio ratios (e.g., 40% stocks, 40% municipal bonds, and 20% cash) might choose to give a stock that would provide an opportunity to reposition investments, balance ratios, and enjoy valuable tax relief.
- A stock that lowered or cut its dividend might be a good option.