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Charitable Giving, Investments, and Taxes

February 24, 2017

If you are considering making a significant charitable donation, making a direct gift of appreciated stock or mutual fund shares may be a great way to avoid capital gains taxes, maximize your charitable giving income tax deduction, and maximize the value of your charitable donation.

First, what does “appreciated” mean in terms of stock and mutual fund shares? Appreciation simply means that the value of the stock or mutual fund shares has gone up since it was bought. When someone then sells stock or mutual fund shares that have gone up in value, the difference between the sale price and the original purchase price is called a capital gain. Individuals then must may capital gains taxes on the amount of the capital gain.

However, if you donate the stock or mutual fund shares directly to the charity, the capital gains tax can be avoided entirely since charities are tax exempt. If the charity then sells the appreciated asset, they get the full market value of the asset without having to pay any capital gains taxes. This benefit also accrues to the individual making the donation of stock or mutual funds because the donor also gets to deduct the full market value of the appreciated asset from their taxes as a charitable donation without ever having to pay capital gains taxes.

For example, if you are considering donating either $3,000 in appreciated stock or selling the stock and donating the proceeds, by donating the stock directly, you will never have to pay the capital gains taxes you would otherwise have owed and you still get to deduct the full $3,000 value of the stock from your taxes this year. If you sold the stock first, you would have to pay capital gains taxes on the stock. The capital gains taxes paid reduces the amount of money you would have to available to donate, the charity would get less money in the end, and you get a smaller deduction on your taxes.

There are some caveats that should be mentioned: first this only applies to appreciated assets. If the value of the stock or mutual fund shares has gone down, then individuals are generally better off selling the asset first, claiming the capital loss on their taxes, and donating the sale proceeds. Second, the benefit of maximizing your charitable deduction only applies if you itemize your deductions on your income taxes. Third, the stock or mutual fund shares must have been held for over a year. If you donate shares that have only been held for a few months, you only get to deduct the purchase price value, not the sale price value, from your taxes.

Finally, donating stock or mutual fund shares can involve additional paperwork. First, contact your selected charity to make sure they are setup to accept direct donation of assets. Second, different brokers and mutual fund companies may have specific forms that they need completed in order to transfer ownership from an individual to a charity. You will have to contact your broker to find out what steps need to be taken. This process can take time, therefore donating stocks or mutual fund shares should not be viewed as a last-minute step to minimize your tax burden.

For advice on getting the most value from your estate planning, please call Martha C. Brown & Associates at (314) 962-0186.

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Martha C. Brown & Associates, LLC assist clients with Estate Planning, Elder Law and Probate in St. Louis City, St. Louis County, St. Charles County, Jefferson County, Franklin County and the surrounding areas including Arnold, Ballwin, Barnhart, Bellefontaine Neighbors, Black Jack, Bonne Terre, Brentwood, Bridgeton, Cedar Hill, Chesterfield, Clayton, Crestwood, Creve Coeur, Crystal City, Des Peres, DeSoto, Ellisville, Farmington, Fenton, Festus, Ferguson, Florissant, Fredericktown, Frontenac, Hazelwood, Herculaneum, High Ridge, Hillsboro, House Springs, Imperial, Kirkwood, Ladue, Lake St. Louis, Manchester, Maplewood, Maryland Heights, Mehlville, Normandy, O'Fallon, Olivette, Pacific, Pevely, Richmond Heights, St. Ann, St. Charles, St. Clair, St. Peters, Ste. Genevieve, Sunset Hills, Town & Country, University City, Union, Valley Park, Washington, Webster Groves, Wentzville , Wildwood.