Smarter Ways to Make Year-End Charitable Gifts

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One way you can make a year-end charitable gift is to write a check to the charity and take a charitable deduction on your income tax return. The problem is that you're using “after tax dollars” to make the gift.

charitable gift palo altoThere is a more tax-savvy way, if you have shares of stock that have appreciated in value since you purchased them. You can contribute the shares directly to the charity instead of simply selling them and then writing a check or taking money out of your bank account.

Assume you want to make a $5,000 gift to charity and you own 10 shares of Apple stock that you bought for $50/share. Your cost basis in the stock is $500 (10 shares x $50/share). Let's assume that, on the day you want to make the charitable contribution, Apple is selling for $500/share. So $500 times 10 shares is $5000, which is the amount you want to donate.

If you're dealing with a medium to large sized charity, you can often go on the charity's web site and find the charity's brokerage account information with XYZ brokerage firm (often in their web site footer). The charity will often list the brokerage account number and provide instructions on how to transfer shares of stock directly into their brokerage account.

You could then call your own financial advisor, tell the advisor you want donate 10 shares of Apple stock to XYZ charity, and give your advisor the wire transfer information (called a “DTC” number) for that charity's brokerage account.

Doing it this way allows you to deduct the fair market value of the shares on the date of the gift - in this case $5000 - on your tax return, but since you only paid $500 ($50/share), your $5000 donation only cost you $500 out-of-pocket.

If, on the other hand, you sold 10 shares of stock and used the sales proceeds to make the gift to charity, you would have less to donate to the charity (because you would have to pay capital gains tax on your $4500 of profit - that is, on your income tax return you would report a sale of $5000 worth of stock, minus your cost basis of $500, showing a capital gain of $4500. You'd have to pay capital gains tax on the $4500 gain. So overall, that would cost you more.

It's good for the charity to receive the stock because, even though there are built-in capital gains, a charity is exempt from having to pay capital gains tax. So you end up not paying any capital gains tax, you get to deduct $5000 from your income tax return, and the charity gets the full $5000 because they don’t have to pay any income tax on the gift….. Everyone wins except for the IRS.

CAUTION: Donating shares of stock that have declined in value since your purchase is not a good strategy.

Topics:  Charitable Donations, Gift Tax, Year-End Planning, Year-End Tax Planning

Published In: Finance & Banking Updates, Tax Updates, Wills, Trusts, & Estate Planning Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Janet Brewer, Law Offices of Janet L. Brewer | Attorney Advertising

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Janet Brewer
Law Offices of Janet L. Brewer

Janet Brewer has practiced California estate, gift-planning, and probate law exclusively since 1991.... View Profile »


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