How to donate stock and win a big tax break

Giving stock instead of cash to a charity means the charity nets more, and you avoid any tax liability

Dec 17, 2014 @ 10:56 pm EST

It happens -- you go to buy someone else a gift and wind up buying something for yourself. Odds are it doesn't exactly feel virtuous. But when you're strategic about how you donate to charity, you can give, get something valuable in return and avoid any hint of guilt.

So rather than, or in addition to, giving online or writing a check, take a look at your stock portfolio. With the Standard & Poor's 500 Index up 11.1% over the past 52 weeks and double where it was at its March 2009, low, a lot of people have long-term capital gains in taxable portfolios. That means they can make cost-effective tax moves by donating appreciated stock.

You could simply sell stock and donate money from the proceeds left over after paying capital gains taxes. But donating securities directly to charity means you'll enjoy a bigger deduction -- and the charity may get a larger donation as a result. (With mutual funds, be careful that you gift shares you've held for at least a year so that the donation qualifies for long-term capital gains treatment.)

An example provided by Charles Schwab shows how donating appreciated stock makes everybody happy. Say you're in the 28% tax bracket and want to donate $100,000 worth of stock. If you sell 1,000 shares at $100 a share you'll pocket $100,000. You'll then pay $14,250 in long-term capital gains, leaving $85,750 to donate. Your personal income tax savings: $24,010 (that's 0.28 multiplied by the amount donated to the charity). Donate the shares directly to the charity instead, and no capital gains tax is imposed. The charity gets $100,000 and your personal income tax savings is $28,000.

A side benefit of gifting appreciated stock is that it can be a good way to rebalance a portfolio, says Ross Levin, president of wealth management firm Accredited Investors Inc. You'll want to donate stock and mutual funds with the biggest long-term capital gains.

If racing to give by Dec. 31 isn't a priority, consider a donor-advised fund. This is basically a family foundation set up on the cheap, and many financial services companies will create one for you. You can put cash, stocks, bonds and other securities into an account and get an immediate charitable deduction on the total contribution. Among the tax advantages, donors may be eligible to take a tax deduction of up to 30 percent of their adjusted gross income for contributions of securities, and up to 50% for cash contributions.

Once you create the fund, there's no rush to start doling out money to charity. “The point of a donor-advised fund is that you get the tax advantage now and you give the money away in the future,” says Michael Kitces, partner and director of research at wealth management firm Pinnacle Advisory Group. You set your own schedule for giving.

Your grant-making activity is limited to IRS-approved tax-exempt charities or 501(c)(3)s. Technically, you can only recommend -- not direct -- that the fund send donations to the charities of your choice. In practice, the fund sponsor accedes to your wishes. You decide how to invest the money in the account, at least within the choices offered by the institution. Many participants find donor-advised funds simplify charitable record keeping and are a good way to involve the whole family in giving.

There's no shortage of companies to help set up donor-advised funds. Starting in the '90s, major financial services companies began creating nonprofit organizations with charitable status so that they could accept assets and oversee accounts. Now, three of the nation's top 10 charities are financial organizations, according to the Chronicle of Philanthropy: Fidelity Charitable (No. 2), Schwab Charitable (No. 4) and Vanguard Charitable Endowment Program (No. 10).

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