What Are the AGI Limits for Donating Appreciated Stock?
Your tax deduction for donated stock is determined by a framework of rules based on your AGI, the asset's holding period, and the type of charity.
Donating stock that has grown in value is a common method for supporting charitable causes. This approach can offer tax advantages, as it allows a donor to give more than if they had sold the stock and donated the cash proceeds. The Internal Revenue Service (IRS) establishes specific rules that govern these contributions. A central component of these regulations involves limits on the amount you can deduct in a single year, which are calculated as a percentage of your adjusted gross income (AGI).
Determining the Deduction Value of Donated Stock
Before you can apply any AGI limits, you must first determine the value of your charitable contribution for tax purposes. This value depends heavily on how long you owned the stock before donating it. The holding period separates the asset into one of two categories, which directly impacts the amount you are eligible to deduct.
For stock owned for more than one year, it is classified as long-term capital gain property. When you donate this type of asset, the deduction is based on the stock’s fair market value (FMV) on the day you make the donation. This rule is advantageous because it allows you to deduct the full, appreciated value of the stock without having to first sell it and pay capital gains tax.
A different rule applies if you have owned the stock for one year or less. In this scenario, the asset is considered short-term capital gain property. The tax deduction for this type of donation is limited to your cost basis, which is the amount you originally paid for the stock. You do not get to deduct the higher, appreciated value.
AGI Limits for Donations to Public Charities
The most common type of charitable recipient is a public charity, a category that includes nonprofit organizations, churches, and donor-advised funds. The IRS sets specific AGI percentage limitations for deductions to these organizations, often referred to as “50% limit organizations.” However, the limit for donations of appreciated stock is more restrictive than for cash.
When you donate long-term appreciated stock to a public charity, your deduction for that year is limited to 30% of your AGI. For example, if your AGI is $200,000, the maximum deduction you can claim is $60,000. If the fair market value of your donated stock was $75,000, you would only be able to deduct $60,000 in the current tax year.
Contributions of cash to the same public charities are deductible up to 60% of your AGI. Donations of short-term capital gain property, which are valued at their lower cost basis, also fall under this higher 60% limit. The lower 30% threshold for appreciated assets reflects the dual tax benefit received: a deduction for the full market value and the avoidance of capital gains tax on the appreciation.
Special AGI Limits for Donations to Private Foundations
The tax rules for donating appreciated stock become more restrictive when the recipient is a private nonoperating foundation. These are typically charitable organizations funded by a single individual, family, or corporation. Instead of running their own programs, they primarily make grants to other organizations.
For a gift of long-term appreciated stock to most private foundations, the deduction is limited to 20% of your AGI. Using the previous example of a donor with a $200,000 AGI, the maximum deduction for a stock donation to a private foundation would be $40,000 (20% of $200,000).
In some specific situations involving donations to private foundations, the deduction may be further limited to the donor’s cost basis rather than the fair market value. This can occur with certain types of property or under specific circumstances defined by the tax code. These stricter rules regulate contributions to entities that are not as broadly publicly supported.
Handling Contributions That Exceed AGI Limits
A charitable gift of stock may exceed the donor’s AGI deduction limit for the year. When this happens, the tax benefit is not lost. The IRS allows taxpayers to carry forward any unused portion of the deduction to future tax years.
If your donation exceeds the 30% or 20% AGI limit in the year of the gift, you can carry the excess amount forward for up to five subsequent years. For instance, if your AGI is $100,000, your 30% limit is $30,000. If you donate stock valued at $50,000, you can deduct $30,000 in the current year and carry the remaining $20,000 forward.
The character of the contribution is maintained throughout the carryover period. This means a donation subject to the 30% limit in the first year remains subject to that limit in the carryover years. Each year, you would apply your deduction against that year’s AGI, continuing to do so until the full amount is deducted or the five-year period expires.
Required IRS Documentation and Reporting
Claiming a deduction for a noncash charitable contribution requires specific documentation filed with your tax return. The form for this purpose is IRS Form 8283, Noncash Charitable Contributions. This form is required for any noncash donation valued at more than $500.
If the total claimed value of your donated stock exceeds $5,000, you must obtain a qualified appraisal. For publicly traded securities, this requirement is met by referencing the publicly available market data for the contribution date, but for non-publicly traded stock, a formal appraisal by a qualified appraiser is necessary.
When an appraisal is required, Section B of Form 8283 must be completed. This section needs to be signed by the qualified appraiser and an authorized officer of the recipient charity. This serves as acknowledgment from the charity and verification of the valuation. Failure to complete this form correctly and attach it to your tax return can result in the disallowance of your deduction.