University of Dubuque



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There's More to Know About Capital Gains Tax

Most people with appreciated assets own at least some publicly traded securities. These are stocks that are listed in the Wall Street Journal and the business pages of other major newspapers around the United States.

People who invest in stocks and bonds and accumulate wealth during their primary earning years—prior to age 65—tend to want to diversify their portfolios and plan for retirement. To do this, they might sell the very assets that created their wealth. But then, they discover that they owe a great deal in taxes—a capital gains tax.

Over the past few decades, the capital gains tax rate has generally been lower than the ordinary income tax rate. Although Congress continues to tinker with both (and probably always will), and even though the capital gains tax rate may be lower than the ordinary tax rate, the capital gains tax is still significant enough to consider a legitimate way to avoid it.

What is the best way? A charitable gift funded with appreciated assets. Why? Because the charitable organization receives the full benefit of the asset, and the donor avoids paying the federal capital gains tax.

Outright Gifts
As an example, assume that Sue has $100,000 of stock for which she paid $10,000 many years ago. If she sells the assets, she pays a tax on the gain of $90,000. At the new capital gains tax rate of 15 percent, the tax due is $13,500 ($90,000 x 15 percent). This means her after-tax proceeds are only $86,500 ($100,000 - $13,500).

But say she makes a gift of the $100,000 in stock. Some people might say that she spent only $10,000 to help a charitable organization with a gift of $100,000. But even if the asset is viewed at its market price, the income tax deduction still makes the transaction economical for the donor.

For example, if Sue is in a 28 percent tax bracket, she removes the $100,000 from her income, so the gift reduces her taxes by $28,000. This brings the net cost of her $100,000 gift down to only $72,000. So, because Sue wishes to make a significant donation to a charitable organization, the combination of the income tax savings from the deduction and the avoidance of a capital gains tax makes a gift of appreciated property compelling.

Deferred Gifts
A life income gift may be even more economically advantageous to the donor, because it can increase the income that the donor was receiving from the asset. Let us look at this example of a charitable remainder trust that pays the donor 5 percent of its value each year for life before the charitable organization receives the remainder of the trust assets. The trust is funded with the same appreciated stock as in our previous example.

Asset value: $100,000
Cost basis: $10,000
Current income from asset (2% dividend): $2,000
Charitable remainder trust income: $5,000
Increase in annual income: $3,000
Capital gains tax avoided (15% rate): $13,500
Deduction amount1: $30,372
Taxes saved because of deduction: $9,533
Total taxes saved: $23,033

Find Out More
Either outright or deferred, a charitable gift funded with appreciated property always makes sense, especially when the asset can be sold easily. Too many people think charities accept only cash, so they sell the asset, pay the capital gains tax, and then donate the after-tax proceeds.

In the example of an outright gift above, the difference to the charitable organization when stock is donated before it is sold is $13,500, an increase of more than 20 percent. So, it makes a difference to do the right thing.

Please contact Advancement Office at 800-483-2586, or e-mail us at, for more information.

1 Assumes a 55-year-old donor, with quarterly payments at a 4.6 percent charitable midterm federal rate

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