Let's walk through some of the basics concerning charitable contributions of stock or other property.

Contributions of ordinary income property: Property is ordinary income property if its sale at fair market value (FMV) on the date it was contributed would have resulted in ordinary income or in short-term capital gain. Examples of ordinary income property are inventory, works of art created by the donor, manuscripts prepared by the donor, and capital assets (such as stock) held one year or less.

The amount of the deduction for the contribution of ordinary income property is its FMV less the amount that would be ordinary income or short-term capital gain if you sold the property for its fair market value. Generally this rule limits the deduction to your basis (or cost, for tax purposes) in the property.

Example: You donate stock that you held for 5 months to your church. The FMV of the stock on the day you donate it is $1,000, but you paid only $800 when you originally purchased it (your basis). Because the $200 of appreciation would be a short-term capital gain if you sold the stock, your deduction is limited to $800 (FMV less the appreciation). However, there is an exception -- you do NOT need to reduce your charitable contribution if you include the ordinary income in your gross income in the same year as the contribution.

As you can see, the result in the example is generally the same as if the donor sold the stock for the FMV and contributed the proceeds. However, a taxpayer who, in the contribution year, has medical expenses of 7.5% of his adjusted gross income (AGI), or has miscellaneous itemized deductions in excess of 2% of AGI, or has other deductions subject to an AGI based floor would be better off contributing the property instead of selling it and contributing the proceeds, since the gain on a sale would increase his AGI and thus decrease his medical (or other) deductions. In order to avoid this problem, try to postpone the stock contribution until the stock is held for more than one year in order to increase the contribution deduction from the property's basis to its FMV.

Contributions of Capital Gain Property: Property is capital gain property if its sale at FMV on the date of the contribution would have resulted in long-term capital gain. Capital gain property (capital assets) includes most items of property that you own and use for personal purposes or investment. Examples of capital assets are stocks, bonds, jewelry, coin or stamp collections, and cars or furniture used for personal purposes. Capital assets also include certain real property and depreciable property used in your trade or business and, generally, held more than one year. (Although you may have to treat this property as part ordinary income property and part capital gain property due to depreciation recapture.)

In the case of qualified appreciated stock, you can claim the FMV deduction up to 50% of gross income. Let's not discuss tangible personal property at this time, which has other special rules. Let's focus only on qualified appreciated stock (QAS). QAS means stock of any corporation for which, on the date of the contribution, market price quotes are readily available on an established securities market, and that has been held for more than one year. In addition, shares of open-end mutual fund stock that the mutual fund must redeem at net asset value upon an investor's demand are also QAS where the net asset value of the shares is quoted on a daily basis in a newspaper of general circulation throughout the U.S.

There are some exceptions as to what QAS does not include, but those exceptions will probably not apply to many of us.

So be charitable, but be tax wise about it.

- Article 07

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