Friday, September 22, 2006

Making the Most of Your Charitable Donations

You probably already know that you usually get a tax deduction for most charitable donations if you itemize your deductions. What you may not have considered is the additional advantage of donating appreciated securities (like a stock that you've had for years but haven't sold because of the capital gains taxes) to charity through a donor advised fund (DAF).

By donating appreciated securities (that you've held for longer than one year), you can avoid the capital gains taxes that you would have paid if you had instead sold the stock and donated the cash proceeds. For example, say you have $10,000 of Google stock that you originally bought for $5,000. Based on this example from the Fidelity Charitable Gift Fund's Calculator, if you donate the stock, your designated charities will end up receiving the full $10,000 and you'll get a tax savings of $2,500 ($10,000 x 25%). If you had instead sold the stock and donated the proceeds, you'd pay capital gains tax of $750 ($5,000 capital gains x 15% (the long term capital gains rate for those in the 25% tax bracket)), so your charities would only get $9,250 and your net tax savings would only be $1,562.50. By donating the stock, you reduce your taxes by an extra $937.50 and the charity receives an additional $750.00.

Contribute Securities
to the Gift Fund
Sell Securities
and Donate Proceeds
Fair Market Value of Securities$10,000.00$10,000.00
Capital Gains Tax Paid*$0$750.00
Charitable Contribution/
Your Charitable Deduction
Total Donor Tax Savings$2,500.00$1,562.50

The above would apply even if you're not donating through a DAF but instead donated your stock directly to a charity. So why would you bother going through a DAF rather than give to the charity directly? One reason is the ease with which you can donate appreciated securities. Sure, you could give your stock to your church or other charity directly, but many smaller organizations may not be very well setup to receive such stock and may not have the guidelines in place to be able to properly manage the stock. Do you really want your church or local charity to have to decide when is the best time to sell your Google stock?

A DAF is classified as a charity so you get the tax deduction when you make the donation, but it is really just a holding place or a conduit. Their function is to distribute your donations to "real charities" that you "recommend." Technically, you only "advise" them on whom to ultimately receive your largesse, but in practice, they'll honor your wishes to practically any charity that the IRS would have given you a deduction if you had donated to the charity directly. In the meantime, they usually have several investment options so that your donations will hopefully grow in the meantime.
Since most of the major online brokerages (like Schwab, Vanguard, and Fidelity) have affiliated DAF's, you can usually just donate your stock with a few clicks. You get the deduction for this year and have the luxury of being able to take a little time to decide how to distribute it and can divide it up among different recipients or break it up and distribute it over time.

I'm not a tax advisor so double check with yours before going through with it, but consider this route the next time before you sell a stock with a large long-term gain.


The Carnival of Personal Finance ‘68 Hits the Oregon Trail | Punny Money said...

[...] Today, we ran across a rich family making the journey to Oregon. They mentioned how they had sold off some of their stock and donated the proceeds to help out displaced Indians. I told them that it’s much better all around to donate appreciated securities directly instead. Upon hearing this, the family was quite distraught, so they gave away all their clothes, too. [...]

Super Saver said...

I use appreciated securities for as many charitible contributions as possible. Most organizations are set up to receive securities and brokerage firms do not charge a fee for charitable transfers. It's easy to do and a great tax savings.

gte said...

Thanks for pointing out that brokerage firms do not charge a fee for charitable transfers. I know that if you transfer from an account at say, Schwab, Fidelity, or Vanguard, to their associated Donor Advised Fund, that they wouldn't charge you. I didn't know that they also wouldn't charge you if you transfer it directly to a charity as well.