A GREAT Idea for Dealing with Large Capital Gains Taxes

In my post titled Six Investment Pitfalls, I made the following comment:

Yep, I've done all of these in my lifetime. Early on in my investing career, when I knew little about the subject and thought I could pick killer stocks better than anyone on the planet, I did all of these -- several times. Then, when I learned a bit more, I became somewhat smarter, but didn't quite get all the facts right again. Now I have some mutual funds that I should have never been in (and want to get out of) but yet have huge capital gains tax implications if I sell them. Making bad decisions early on can certainly have long-term consequences. Hopefully, someone can learn from my mistakes.

A reader left the following comment:

Your comment about capital gains on the unwanted mutual funds sent me on a 30-minute exploration of irs.gov (courtesy of my employer) and Pub 590 looking for a way to make IRA contributions ('tis the season, you know) in non-cash form. No luck.

You could, however, make charitable contributions in the form of stock or mutual funds. If your level of charitable giving reaches such a level, it could be tax-deductible for you. Your church, for example, might be willing and able to accept shares instead of weekly cash in the plate and you kill two birds with one stone.

What a GREAT idea!!!! It's so simple! And so straight-forward! And so easy (I hope -- I've contacted Vanguard, we'll see what they say)! I can't believe I didn't think of this option myself.

So here's what I did/will do:

1. Select a mutual fund I want to get out of. (Done.)

2. Contact Vanguard about how to gift the shares of this fund to a charity. (Done -- waiting a response.)

3. Arrange with the charity to gift them the shares.

4. Complete the transfer.

5. Take the money I was going to give the charity (which I'm now giving via the mutual fund donation) and put it into savings -- thus replenishing the savings I lost.

6. Re-invest the new savings into the funds I want it to be in!

Sound like a good plan?

Comments

[fivecentnickel.com]

Yes, sounds like a great plan as long as: (1) you have a fund that you wish to get out of, and (2) your charity of choice can deal with this sort of donation.

[tinyhands]

Agreed, that's exactly how I would do it. Your charity of choice will likely prefer/require you to make a donation above a set level. In the case of a church, it may be equivalent to making a year's worth of weekly contributions all at once. Your mileage may vary.

Also, don't be surprised if your charity is not used to this sort of donation and is hesitant to accept it. Consider volunteering your time to help them with it as well and you might find that others are willing to give similar gifts. Your initial contribution then goes much farther.

[Tither]

How do you calculate tithe when you have mutual funds that you didn't sell, but for 2007, they are showing huge capital gains even though the value of the fund holding and fund price has gone way down?

[FMF]

Here's how I do it:

http://www.freemoneyfinance.com/2007/11/tithing-and-inv.html

[Jason]

It seems there would be strategy involved in which shares you would want to transfer to the charity. Meaning that you would ideally want to use the specific shares method and select the shares purchased at the lowest price to leverage the ability to "raise" your overall cost basis and reduce the gap between cost basis and value. Are you able to select specific shares to do this?