Put Away Your Check Book
It may be hard to find winning investments in your portfolio this year. But if you do and you’re in a charitable mood, consider donating appreciated securities -- stocks or mutual funds -- instead of cash.
When you give $1,000 in cash, you get to deduct $1,000, and that saves you $250 in the 25% bracket. (Any state income-tax savings are gravy.)
But let's say you have $1,000 worth of mutual fund shares that you bought more than a year ago for $500. If you sold those shares, you'd owe $75 in tax on the profit even at the preferential 15% capital-gains rate. But if you donate those shares, the charity gets the full $1,000 (it doesn't have to pay tax on the profit when it sells), you avoid that $75 tax bill and you still get to deduct the full grand. It's a win, win, win situation.
This gifting strategy does not work for investments that have lost value. For example, if a stock that you bought for $1,000 is now worth only $400 and you donate it to a charity, your deduction would be limited to the current $400 value.
At that point, you would be better off selling the stock, making a tax-deductible contribution of $400 in cash to the charity and claiming a $600 capital loss. You can use your capital losses to offset your capital gains, after which you can use up to $3,000 of capital losses to offset ordinary income. Any excess losses can be carried forward to use in future years.
What if you don't want to part with your investment? Give it away anyway, and use the cash you would have donated to re-invest. The maneuver is perfectly legal and simply wipes out the tax bill that's built up so far and establishes a new basis. (This applies only to your taxable accounts, not to your tax-deferred retirement accounts.)
Giving appreciated securities sounds like a maneuver for fat cats, but it can pay off for philanthropists of more modest means, too. The charity you plan to help should be more than willing to fill in the details. Time is running out, though, and it will take a little longer than writing out a check. The transfer of ownership has to be completed by December 31 to lock in the deduction for your 2008 return.