The holiday season is when many people do a significant portion of their charitable giving for the year. Once you have decided which charitable organization to support and how much, you should also consider how
to give that support. What I am getting at is that you can be charitable and tax-savvy by donating highly appreciated stock.
Donating a highly appreciated stock or mutual fund is a great strategy for getting rid of an investment that you have been holding because you do not want to pay the capital gains tax. The beauty of donating “in-kind” some or all of a security holding is that you get the full charitable deduction without paying the capital gains tax. “In-kind” means that the investment is not sold, but is transferred as-is to the charity instead. This way you do not have to pay the capital gains tax, because you did not sell the investment. The charity will likely sell the investment to meet their funding needs, but as a non-profit organization, they pay no tax on the sale.
The catch is that you have to have owned highly appreciated investment for more than one year. If you transfer an investment that you have owned for less than one year, you can only deduct your original cost in the investment and not the appreciation!
Of course this strategy is a bit more complicated than writing a check. You will need to obtain account information from the charity as to where to transfer the highly appreciated investment. You will then need to contact you investment broker and direct them to transfer the investment to the charity’s account. It is not difficult though; most charities are more than happy to help and it is something that investment brokers handle for their client on a regular basis.
The transfer has to occur by December 31st
to qualify as a current year contribution. You cannot donate investments that have lost value and deduct their higher original cost. If your donation totals more than $250, the donation must be recorded – meaning that the charity must send you a written statement describing the donation and its value. You or your tax preparer will also need to fill out and include Form 8283 Noncash Charitable Contributions
in your tax return, listing information about the charity and investment contributed.
Despite the extra work, donating highly appreciated stocks or mutual funds can be a win-win for you and the charity. This holiday season think about sharing some of your investment success with your favorite charity instead of with the IRS in April.
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