Save on Taxes and Give a Bigger Gift by Donating Securities Instead of Cash

In March I mentioned that I wanted to move some money from mutual funds I'd bought years ago to index funds but that the mutual funds would trigger pretty big capital gains taxes if I sold them. Then a reader comment with a great idea -- suggesting I get rid of unwanted securities by donating them to a qualified charity. Since I have charitable commitments throughout the year (thanks to this blog, in part), giving securities was a great way for me to get rid of funds I no longer wanted to hold while avoiding capital gains taxes. Then I replace these funds with savings from this year's income (money that I would have donated but which is now covered by the securities) and invest them in the index funds I want my money in. It's a great plan!

I've taken advantage of this idea twice so far this year and have plans to do so at least once more (I've qualified a new charity -- making sure they can accept gifts this way.) Vanguard makes it pretty simple. All I do is fill out a form, send it to the charity, they complete a section, and the money is transferred. Easy as pie. 

For those of you who want more specifics on how this works and the savings that can be achieved, here's an article from Vanguard on donating securities instead of cash. An overview:

Giving away appreciated securities such as stocks, bonds, or mutual fund shares offers an additional tax benefit: You can generally take a tax deduction for the full market value of the securities donated and also avoid paying tax on the capital gains on the investment. To qualify, you must have owned the security for more than a year and the deduction cannot be more than 30% of your adjusted gross income (AGI) in any given year. (If your deduction would be more than 30% of your AGI, you can spread it out for up to five years.)

Vanguard also gives an example of how much this method can save you in capital gains taxes. They start with a set of assumptions:

For example, suppose that you bought 1,000 shares of a stock mutual fund 15 years ago for $5,000 and those shares are now worth $45,000. Also assume that you are in the 28% marginal tax bracket and are not subject to limitations on deductions.

Now here's what happens if you sell the fund shares yourself and make a cash donation -- you net a $6,600 reduction in taxes:

Sell fund shares and give cash, pay capital gains. If you sell the fund shares and give the cash proceeds to charity, you'll be able to take an itemized deduction on your federal tax return of $45,000, saving you $12,600 in income tax ($45,000 × 28%).

But you'll also owe tax of $6,000 on your long-term capital gain (15% × $40,000), which—since you've donated the proceeds—you'd most likely have to pay out-of-pocket from another source. Therefore, the net reduction in your tax liability is $6,600 ($12,600 – $6,000).

But if you donate shares instead, you avoid capital gains and net a $12,600 reduction in taxes -- saving you $6,000!!!!!! The details:

Donate fund shares, avoid capital gains. If you had given the fund shares directly to charity instead, you would have avoided owing capital gains tax while still being permitted to take the $45,000 deduction. Therefore, the net reduction in your tax liability would be the full $12,600—providing the opportunity to give even more, if you choose.

Now I didn't give $45,000 and I certainly didn't have the $40,000 in capital gains they note above. But once all is said and done this year, I think I'll end up saving a couple thousand dollars. Plus I'll fulfill my charitable commitments AND be able to shift my investments into funds I want to be in. It's a winning idea all the way around!!!!!

Comments

[Rich Schmidt]

Our church is in the process of setting up a brokerage account with a local advisor/broker/whatever so that we can accept gifts of stock from some of the folks in our church who want to give that way. It's making me think about how we give what we do...

[Kurt]

I would imagine this would run head long into the AMT at any significant dollar figure? How easy is it for the charity to get cash from this type of transaction? Trying to get a sense of what a reasonable floor is for donating securities (if it's a big hassle relative to donating cash, they would likely not prefer to go through it so you could save $30 on taxes).

[FMF]

Kurt --

As far as the AMT goes, it counts as a donation in the same way any other donation would count. In other words, there's no difference in giving money this way versus giving it directly as related to the AMT.

As far as the hassle goes, Vanguard makes it REALLY easy. I fill out the forms, send it to the church, they fill out one page with about seven blanks, and send it to Vanguard. Five days later, they have their money.

[tinyhands]

Yay! I'm so happy this is working out so well for you AND your chosen charities.

[Eric]

Great timing on this post. I had my church sign my stock donation forms earlier today. How are you going to determine the value of the shares you donate to them? Will you just use the closing price of the stock on the day the transfer takes place? Is there a better way?

[FMF]

Vanguard sends me a report on the value of the funds on the day the donation took place. Also with Vanguard, you can select whether you want to give a specific number of shares or a specific dollar amount.