The Reference Section

A collection of wealth improvement articles

Consider Donating Appreciated Stock & Mutual Funds

One way to reduce your tax bill this year is to donate appreciated stock to a charity of your choice versus writing a check. This part of the tax code provides a tax benefit to you in two ways:

  1. Higher deduction. Your charitable gift deduction is the higher Fair Market Value of the appreciated stock on the date of your donation and not what you originally paid for it.
  2. No capital gains tax. You do not have to pay tax on the profits you made on the stock. As long as you have owned the investment for over one year, you can avoid paying long-term capital gain tax on the increased value of your stock.

Other benefits

  • The Alternative Minimum Tax (AMT) does not impact charitable deductions as it does with other deductions.
  • Remember this approach also provides more funds to your selected charity. By donating cash or check, those additional funds are instead paid as federal taxes.
  • This tax benefit could be worth even more with an increase in the maximum long-term capital gain tax rate and the introduction of the potential 3.8% Medicare surtax for investments.
  • This benefit is for everyone who itemizes deductions that have qualified assets, not just the wealthy.

Things to consider

  • Remember this benefit only applies to qualified investments (typically stocks and mutual funds) held longer than one year.
  • Consider this a replacement for contributions you would normally make to qualified organizations.
  • Talk to your target charitable organization. They often have a preferred broker that can help receive the donation in a qualified manner.
  • This benefit also works for mutual funds and other common investment types, but be careful as many investments such as collectibles, inventory and other property do not qualify.
  • Contribution limits as a percent of Adjusted Gross Income may apply. Excess contributions can often be carried forward as deductions for up to five years.
  • How you conduct the transaction is very important. It must be clear to the IRS that the investment was donated directly to the charitable organization.