Consider Donating Appreciated Stock & Mutual Funds

Consider Donating Appreciated Stock & Mutual Funds

In some rare cases, making a tax savings move can benefit you in more than one way. This is the case with direct contribution of qualified investments, such as stock, owned more than one year that have appreciated in value.

One way to reduce your tax bill this year is to donate appreciated stock to a charity of your choice versus writing a check. This part of the tax code provides a tax benefit to you in two ways:

  1. Higher deduction. Your charitable gift deduction is the higher Fair Market Value of the appreciated stock on the date of your donation and not what you originally paid for it.
  2. No capital gains tax. You do not have to pay tax on the profits you made on the stock. As long as you have owned the investment for over one year, you can avoid paying long-term capital gain tax on the increased value of your stock.

A Sweet Example

Winnie and Christopher each own 100 shares of Honey, Inc. that they purchased for $1,000 three years ago. Today the stock is worth $5,000. Winnie sells the stock and donates the proceeds to “Save the Bees” while Christopher donates his stock directly to “Honey Overeaters: Finding a Cure”. Assuming a 15% long-term capital gains tax rate*, a 25% income tax bracket, and no other limitations:

Donations table

Not only does Christopher see $750 in additional federal tax benefit by donating his appreciated stock, but Honey Overeaters has $600 in additional funds to use for their charitable program.

* Long-term capital gains tax rates on this type of investment can be as high as 23.8% for those in the 39.6% income tax bracket.

Other benefits

  • The Alternative Minimum Tax (AMT) does not impact charitable deductions as it does with other deductions.
  • Remember this approach also provides more funds to your selected charity. By donating cash or check, those additional funds are instead paid as federal taxes.
  • This tax benefit could be worth even more in 2013 with the increase in the maximum long-term capital gain tax rate from 15% to 20% and the introduction of the potential 3.8% Medicare surtax for investments.
  • This benefit is for everyone who itemizes deductions that have qualified assets, not just the wealthy.

Things to consider

  • Remember this benefit only applies to qualified investments (typically stocks and mutual funds) held longer than one year.
  • Consider this a replacement for contributions you would normally make to qualified organizations.
  • Talk to your target charitable organization. They often have a preferred broker that can help receive the donation in a qualified manner.
  • This benefit also works for mutual funds and other common investment types, but be careful as many investments such as collectibles, inventory and other property do not qualify.
  • Contribution limits as a percent of Adjusted Gross Income may apply. Excess contributions can often be carried forward as deductions for up to five years.
  • How you conduct the transaction is very important. It must be clear to the IRS that the investment was donated directly to the charitable organization.

If you think this opportunity is right for you, please contact a trusted advisor to ensure you handle the donation correctly.

Research Your Preferred Charities

Often during an audit, what you thought was a qualified deduction to a charitable organization is ruled non-deductable. How can this happen? Here are some hints to make sure your charitable contributions are put to good use, both at the charity and on your tax return.

November and December seem to be the months we are rained upon with charitable organization solicitations. Some of the groups, such as the American Red Cross, the Salvation Army, United Way, and the American Cancer Society are household names. Others are less known. Here are some tips on how to research these organizations prior to donating funds.

1. Charitable organization efficiency. For every dollar you donate, only a percentage of it is actually used to fund programs. Much of your money is used for fundraising and administrative costs. So how do you know which charitable organization is using your contribution most effectively? Here are three web sites that can help you assess potential charities.

2. Avoid Fraudulent Solicitations. It is often best to avoid donating over the phone or via email solicitations. These are two common ways thieves target their victims. Instead of reacting to a phone call or email, a better idea is to pro-actively plan who you wish to give money to each year. An additional benefit of this approach is that you avoid the fees paid to these middlemen fundraisers out of your donations.

3. Confirm the Deductibility. Many smaller organizations will represent themselves as a qualified charitable organization, but have not kept their non-profit status up to date. If unsure whether your desired charity has kept their records up-to-date, you can check the IRS web site for a full list of qualified organizations. Here is the link:

4. Needing a receipt. Remember cash donations $250 or more require a written confirmation from the charitable organization of your donation in addition to your canceled check or bank receipt. If you are not sure whether a confirmation will be forthcoming, limit your deduction to some amount under this $250 threshold.

Document those Non-cash Charitable Donations! – Tips to ensure their deductibility

Too often taxpayers lose out on the opportunity to reduce their income by the value of their donations. Here are some tips to make sure this does not happen to you.

One often over-looked way to reduce your tax obligation is to donate gently used items to a favorite charity. Too often this is done without the necessary forethought to ensure you can deduct the value of these donations on your tax return. Here are some tips to ensure you can receive this tax benefit.

  • Good or Better Condition. Remember only items donated that are in good or better condition can be used as a charitable contribution on your tax return.
  • Document your donation. Fill out a donation sheet each time you donate. The sheet should include the name of the charitable organization, address, date, and types of items donated. It should also include a detailed list of the items donated, their initial value and the donated value. Note the value you are assigning to each item donated.
  • Take a Photo. Use this photo as a visual documentation of what you donated.
  • Get an acknowledgement and receipt. Even if the donation is small, always ask for an acknowledgement of your donation. Even churches should be ready and willing to do this for you.
  • Establish reasonable value. Do not overstate the value of the items you donate. Use places like e-bay, Amazon, the Salvation Army and used book/consignment stores to establish the used values of your items.
  • Donate entire ownership. The IRS does not like donation of part ownership of items. It is always best to make donations with no strings attached.
  • Track your mileage too. Remember even your miles driven to and from the charitable location are deductible too.
  • Have your warning antenna go up. The IRS has special rules for charitable donations. While they can be complex, here are some red flag items that should warrant consultation prior to donating the following:
    • Any stocks and investments owned for one year or longer
    • Any items valued over $250 or $500 or $5,000. Each of these levels can introduce new documentation requirements and a potential requirement for appraisals.
    • Cars, boats, RVs, and other major assets
    • Giving items to unfamiliar charitable organizations

Should you Reduce Your Charitable Giving? – New itemized deduction phase-out causing concern

With the re-introduction of itemized deduction phase-out, does it still make sense to contribute to charities? For most taxpayers, the answer is a resounding yes. Continue to make charitable contributions. Here is what you need to know.

In 2013 federal tax legislation reintroduces the phase-out of itemized deductions for certain taxpayers. Because of this, many who are subject to itemized deduction phase-outs wonder if the benefit of charitable giving is reduced. Here is what you need to know.

  1. Most taxpayers are not impacted. The phase-out of itemized deductions for 2013 is based on Adjusted Gross Income (AGI) in excess of $250,000 for single filers, $300,000 for joint filers ($150,000 for married filing single), and $275,000 for head of household. So if your income is below these amounts your itemized deductions will not be reduced because of the new phase-out rules.
  2. Alternative Minimum Tax (AMT) does not impact charitable giving.If you have been subject to the AMT in the past, please note that charitable giving generally does not impact this alternative tax calculation. Other things like state taxes and property taxes are a couple of items that do impact this alternative tax calculation.
  3. The phase-out calculation is based on income not deductions.  This means that unless you are in a low or no tax state your charitable deductions will probably not be impacted by the deduction phase-out. Why? The itemized deduction phase-out amount is based upon your income. Say, for example, the phase-out calculation will reduce your itemized deductions by $8,000. Income required to produce this phase-out amount will also generate state taxes in most states in excess of this amount. Therefore the phase-out reduction will almost always be absorbed by your state income taxes.

“Are there cases when the phase-out will eat up a lot of your charitable giving? Yes, especially in no or low tax states. Because of this risk it is a good idea to review the phase-out impact on your situation as soon as possible. Otherwise, you might be foregoing an opportunity to reduce your tax liability this year with planned charitable giving.”