Investment Donations and the Charitable Deduction
June 23, 2015
Recently the IRS released statistics about individuals who claim a deduction of more than $500 for making noncash donations to charitable organizations. These donations – which can include clothing, household items, food, art, stock, or any other noncash property – accounted for 24.6% of all deductible charitable contributions in 2012.
For many individuals, noncash donations are a convenient way to contribute clothing or household items that they no longer need to a good cause. And for some charities, it’s more efficient to receive donations of property than to purchase their own goods. But, for many taxpayers, noncash donations are a way to avoid capital gains tax liability on the donated asset.
When individuals seek a deduction for a noncash donation, they are required by federal law to estimate the fair market value of the property they donated. For donations of cars, electronics, and clothing, for instance, the fair market value that individuals can deduct is often far below the amount they originally paid. For food donations, the fair market value is usually roughly the same as the original cost of the food. And, for donations of corporate stock and other investments, the fair market value of the investments is often far higher than the price the donor bought them at.
So, it is unsurprising that the majority of noncash contributions that individuals deducted in 2012 were donations of financial assets. Out of the $42.91 billion of noncash donations reported on Form 8283, $22.07 billion were contributions of corporate stocks, mutual funds, and other investments.
One of the most important reasons why investments represent such a large portion of deductible noncash contributions is the well-known tax advantage of donating stock to charity. Individuals who contribute “capital gain property” they have held for more than a year to a charitable organization are generally exempt from capital gains taxes on that property. This means that individuals can often avoid substantial taxation on their investments if they donate them to charity and count them as a deduction.
Only a small number of taxpayers take advantage of the opportunity to avoid capital gains taxes by donating investments. Out of the 7.5 million taxpayers who filled out Form 8283 to report noncash donations greater than $500, only 134,029 returns listed donations of investments, less than 1.8%.
Yet, the donations reported on these few returns accounted for more than half of the value of all noncash contributions in 2012 – in part because the donors in question are mostly high-income. Some 86.1% of taxpayers who reported donations of corporate stock, mutual funds, and other investments on Form 8283 had more than $100,000 in Adjusted Gross Income. Furthermore, 56.5% of the value of all reported investment donations in 2012 came from donors who made more than $10 million. Just as wealthy Americans disproportionately benefit from the charitable deduction overall, high-income taxpayers are the ones taking advantage of the opportunity to donate investments without paying capital gains taxation.
Donating stocks and other investments to charitable organizations, rather than cash, is a tax benefit for more than a 100,000 Americans. While donation to charity is admirable, the confluence of tax-exempt status and a capital gains tax system under current law results in an unfortunate incentive for philanthropists to tax plan.