Q Dear Rick:
This is the time of year that I make all my charitable contributions, and I have some questions for you. I remember last year that you wrote a column about giving stocks to a charity as opposed to writing a check. My first question to you is does that still make sense? Also, does it matter if it is a stock or a mutual fund? Also, does it make a difference whether I have a gain or loss in the fund that I plan to gift?
A Dear Nick:
Yes, it still makes sense to gift securities whether it is a mutual fund or an individual stock. However, the key is that it should be appreciated securities; in other words, a stock or a mutual fund where you have a gain. If you have a loss in an investment, then it would make more sense to sell the investment and then to donate the cash.
The reason it makes sense to gift appreciated securities is that you get a double tax benefit. First, your deduction on your tax return is the fair market value of the stock. Thus, if you paid a dollar a share for the stock and today it’s worth $10, when you donate that stock you can write off the full $10 a share. The other tax benefit is the fact that in the aforementioned example where you paid one dollar a share and today it’s worth $10 a share, you would have a nine-dollar a share gain. If you contribute those shares, you do not have to pay taxes on the nine-dollar gain; therefore, you get a double tax benefit. On the other hand, if the numbers were reversed where you paid $10 a share and today they are at one-dollar share, if you donate the shares your charitable contribution is only one-dollar a share and you cannot write off the nine-dollar a share loss. Therefore, if you have a loss in an investment, the strategy is to sell the investment and using the aforementioned example, you would be able to deduct the nine-dollars a share as a capital loss. Then, you can take the cash you received, donate that and get a full charitable contribution.
For those of you who are generous in nature, donating appreciated securities is a very good strategy. You should also know that from the charity standpoint it virtually makes no difference to them whether they receive cash or appreciated securities. More likely than not, upon receipt of the stock they will sell it and there will be no tax consequences to them. Therefore, for those of you who are concerned that by donating appreciated securities you will cause the charity to be taxed, you don’t have to worry because there will be no tax consequences to the charity.
One last note regarding donating stocks or mutual funds to a charity, don’t forget for those of you who are over 70½ and thus have to take minimum required distributions from your retirement accounts, you can do that as well; thus, avoiding being taxed on the distribution. This makes sense particularly for those who do not itemize their deductions and in addition, it makes sense for those who if they recognize the income from the required minimum distribution, may find themselves in a higher tax bracket or would be subject to increased premiums for Medicare.
If you are going to donate appreciated securities or your minimum required distribution, the transaction must be completed before the end of the year. Remember, IRA custodians get very busy near the end of the year; therefore, if you are thinking about doing this transaction, do not delay too long. It’s hard to believe but the New Year is rapidly approaching.
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org