Make Your Donations Count: Give Stock to Charity

Want to make a sizeable gift to charity this holiday season? A good way to do so, and earn a significant tax deduction, is to donate from your investment portfolio instead of giving cash. This is especially true if you have assets that have appreciated in value. According to the California Society of CPAs (www.calcpa.org), when you donate stocks instead of cash, your benefits are two-fold: You get a deduction for the stock's full market value and avoid paying capital gains tax on the appreciation.

How It Works
Let's begin by assuming that you plan to donate $10,000 to your favorite charity. Let's also assume that a stock investment you made several years ago for $5,000 has appreciated in value to $10,000. If you were to sell the stock and then donate the proceeds, you would, most likely, pay $1,000 in capital gains tax (20% capital gains tax on the $5,000 in appreciated value), leaving $9,000 for the charity.

An alternative strategy, and one that gained favor during the bull market, calls for giving the appreciated stock directly to the charity. In this scenario, the charity gets the full $10,000 in stock, which it can turn around and, as a tax-exempt entity, sell without paying taxes on the gain. You get a deduction for the fair market value of your donated stock and avoid paying tax on the appreciation. (The fair market value of securities listed on a public exchange is the average of the high and low sales price on the date the donation is made.) The only loser is Uncle Sam, who is never paid tax on the capital gain. Although your total charitable deduction is limited to 30 percent of adjusted gross income (AGI), you may use any remaining deduction over the next five years.

Some charities also can accept mutual funds shares, but the charity must have or open an account with the fund. Once the charity's account is opened, you can direct the fund to transfer your shares to their account. To maximize your tax savings, be sure to ask the fund to transfer the shares that you paid the least for since those shares will usually have accumulated the most capital gains.

Details You Need To Know
To ensure the maximum tax benefit for a contribution of appreciated property: be sure it has been held for more than one year. The deduction for short-term capital gain property (held for less than a year) is limited to your purchase price for the stock.

You also want to be sure that the recipient of your donation is a qualified charitable organization and that the charity (1) acknowledges the gift in writing and (2) provides you with a record of the asset's value on the transfer date.

Making the Transfer
Transferring the stocks is relatively easy. If you have the certificates in your possession, most charities will be more than willing to provide you with instructions on how to send the stock certificates and stock power authorizing the change in ownership. If the stocks are held in street name (i.e., held by a stockbroker or in the name of the brokerage company), ask the charity to provide you with the information your broker needs to make a wire transfer to the charity's brokerage account.

If you are planning a year-end donation of securities, don't wait until the last minute. Generally, the gift is not considered complete until the properly endorsed securities are mailed or delivered to the charity or its agent.

Tax Treatment of Other Non-Tax Gifts
There are other types of property you can donate in addition to stock, such as artwork, collectibles and other tangible items. You are entitled to a full deduction for the fair market value of tangible personal property held longer than one year only if the charity uses the item in connection with its tax-exempt purpose. For example, a painting donated to a museum would qualify, provided that the organization holds on to the work for at least two years before selling it. You can protect your deduction for fair market value by obtaining a letter from the charity stating that it intends to use your gift in connection with its tax-exempt purpose.

Giving gifts of appreciated property requires careful planning. Professional advice from a CPA will help to ensure that you receive the greatest tax benefit for your generosity.