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Get tax break for gift, avoid capital gains levy
Published on Thursday, Dec 20, 2007
Americans are generous people who give billions to charity each year, including $223 billion donated by individuals in 2006, according to the Giving USA Foundation.
Sad thing is, we could give billions more if we knew how and got better advice.
For example, donors who make their gifts by check when they could donate appreciated securities instead are collectively forfeiting $2.2 billion to $4.5 billion a year in tax savings, a new study estimates. They could pocket those savings or use them to give more.
''In short, millions could save billions or give billions more,'' said Steve Feinschreiber, senior vice president of research for Fidelity Investments, who wrote the study. (Examples of appreciated securities in this context include shares of stocks or mutual funds held more than a year and worth more than when bought.)
Example: You want to donate $10,000. Even if you could simply write a check, you'd be better off scouring your taxable investments for securities that have gone up in value.
You might find stocks or fund shares you bought for $5,000 that are worth $10,000 now. By donating the securities, you get the same tax deduction for gifts to charity as you would by writing a check. And you avoid having to pay capital-gains tax on their price appreciation.
Assuming a 15 percent tax rate on long-term gains, you would potentially save $750. The charity can sell the donated securities at their current value without paying tax either. If you want to remain invested, you can use your $10,000 to again buy as many shares as you donated. Any future capital-gains tax would apply only to an increase in value over $10,000.
Pretty neat, eh? But millions of people don't donate appreciated securities because they don't realize they can or think the process is too complicated.
Fidelity surveyed 508 households with at least $100,000 in investable assets who made charitable donations of $1,000 or more at least once in the previous three years. Fewer than a third recognized the added benefit of donating appreciated securities. Just 5 percent reported having donated them to charities in the previous three years.
Among the rest, 39 percent said they did not want to part with investments that were doing well, not realizing they could simply buy them again. Also, 23 percent said donating appreciated securities involved too much paperwork.
Not all charities accept appreciated securities. Some require very large donations to do so. But several firms that cater to individual investors, such as Fidelity, Vanguard, T. Rowe Price and Charles Schwab, have established separate donor-advised funds that accept appreciated securities with simplified paperwork and have comparatively modest
minimum initial contributions (Fidelity, $5,000; T. Rowe Price and Schwab, $10,000; and Vanguard, $25,000.)
With donor-advised funds, one contribution can be divided among multiple charities as recommended by the donor. Grants from the fund to donor-recommended charities don't have to be made at the same time — or in even the same year — that the donor makes a tax-deductible contribution to the fund.
''It's a real advantage when the decision to donate is independent of the decision about which charities to support,'' said Ann Boyce, president of the T. Rowe Price Program for Charitable Giving. Despite these advantages, 70 percent of the households in the Fidelity survey had never heard of donor-advised funds.
Fidelity also found that more than half the households surveyed use a financial adviser, but fewer than one in five said the adviser helps manage or recommends charitable-giving strategies.
A survey by Schwab Charitable found that 37 percent of advisers are concerned about their level of expertise in this area.
Send questions or comments to Humberto Cruz at AskHumberto@aol.com or by mail to Tribune Media Services, 2225 Kenmore Ave., Buffalo, NY 14207. Personal replies are not possible.
Americans are generous people who give billions to charity each year, including $223 billion donated by individuals in 2006, according to the Giving USA Foundation.
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