Investment Strategy – Another Way To Donate Money

Donating appreciated stock to charity is a very common tax tool for the wealthy. When you donate stock that you have held for more than a year (through direct transfer of the stock to the charity) you get a tax deduction for the fair market value of the stock, on the date of donation. In general, my tax clients contribute aggressively to retirement and usually do not carry much in investments outside of their tax-deferred accounts. The very wealthy, on the other hand, tend to have more money, income, and investments than they know what to do with. Rather than selling investments and generating more capital gains, and generating more cash that they do not need, they often donate the stock instead. It is a way to unload taxable assets and to also give at the same time. We probably wish we were all so lucky to have more stock than we know what to do with. I never really thought about this tax strategy beyond a tax and giving tool for the wealthy.

However, I was reading where this strategy can be used on a more average level of wealth. If giving is important to you and you tithe a certain percent to church or charity every year, a good strategy is to consider donating some of your appreciated investments instead. The reason this can be beneficial on a much smaller level, is that you can give away an amount of appreciated stock, get a charitable deduction for it, and it frees the cash that you would have tithed to be reinvested. As a strategy, if you have invested some stock or mutual funds that have done extremely well, this is a way, in a sense, to take the money out and re-invest it without generating any taxable gains on the sale of investments.

Just one thing to keep in mind: You can only take the charitable deduction if you itemize your deductions on your tax return.

As far as deducting stock that has lost value, there is little value to donating it. You are better off selling it to offset taxable gains, and taking the capital loss on your tax return. Then you can donate the cash proceeds to the charity and write that off as well. Just to be clear that the strategy above only holds for appreciated stock. Also, you need to hold the stock for at least one year before you can donate it and take the fair market value as a deduction.

In general you should be able to transfer X amount of shares of your stock or mutual fund, even if you do not want to transfer over the entire balance. It is best to contact the charity first, to let them know of your planned gift, and to help you through the process, so that it is done correctly.

Hat Tip: Free Money Finance

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