Tax Tips
Donate Appreciated Assets
Giving stocks or mutual fund shares instead of cash to charity will let you score a deduction and avoid a capital gains tax bill.
By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance
December 7, 2006
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One of the finest holiday traditions is sharing your wealth with the less fortunate. But before you open your checkbook or reach into your wallet this year, consider a better way to fund your favorite charity. If you donate appreciated assets, such as stocks or mutual fund shares, rather than cash, both you and the charitable organization will reap the benefits. Here's how it works.
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.) Remember, you have to itemize your deductions to benefit from the tax break -- something that two thirds of American taxpayers don't do. For 2006, you would itemize only if your total deductions are greater than your standard deduction, which is $5,150 for individuals; $7,550 for heads of households; and $10,300 for married couples.
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 special 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 1,000 bucks. It's a win, win, win situation. (This only works when the assets are held in a taxable account, not an IRA or other retirement account.)
But 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 donated 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.
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.
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. But don't delay. Gifting appreciated assets takes 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 2006 return.