If you're planning to make charitable contributions this year, you may want to consider a gift of stock. Donating appreciated stock can save you money on your taxes in two ways: not only do you get a deduction for the donation, but you also don't have to pay taxes on any of the gains.
Donation Deduction Value
The amount that you can deduct when you donate stocks is the fair market value of the shares at the time you make the donation. This includes any taxable gains you would have made on the sale of the stock, as long as you held it for at least a year. For example, if you bought stock two years ago for $5,000 and it's grown in value to $8,000 when you donate it, you can claim an $8,000 deduction.
The amount that you can deduct on your taxes for the year of the donation might be limited, depending on your adjusted gross income. The IRS limits the amount of your deduction of appreciated property to 30 percent of your AGI for most donations. However, if you donate to certain types of charities, such as veterans groups or non-profit cemeteries, you're limited to 20 percent of your AGI. If you can't deduct all of your contributions in the year you make the donation, they can be carried forward for up to five years.
Stocks that Lost Value
If you donate stock that has lost value, you are stuck deducting only the fair market value of the stocks. In addition, you can't take a loss for the difference between what you paid for the stocks and the fair market value when you donate it. Therefore, if you find yourself wanting to donate stocks that have lost value, you may want to consider selling them first so that you can take a loss on your taxes and then donating the proceeds to the charitable organization. This will also allow you to take the charitable donation deduction.
Claiming the Deduction
To claim the deduction for charitable donations, you have to itemize your deductions. Itemizing requires you to give up your standard deduction, so you should only itemize when your itemized deductions exceed your standard deduction. The itemized deductions are reported on Schedule A and then the total is copied to Form 1040. When donating stock, you need to keep records of the name of the stock, type of stock and whether it is traded on an exchange. You should also record how much the stock was worth, when you donated it and the charity that received the donation.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."