Year-End Charitable Tax Planning

Donating appreciated assets (including securities) can be a thoughtful tactic for people who can’t offset capital gains with capital losses.

Example 1: Lynn Knight invested $8,000 in an aggressive stock fund in 2009. The shares are now worth $20,000, thanks to some excellent selections, but Lynn believes it is time to take her gains. Selling the shares would generate a $12,000 long-term capital gain, costing Lynn thousands of dollars in tax.

In our scenario, Lynn has no old or new capital losses she can use to offset her gains. She does have a commitment to donate $10,000 each year to her alma mater. Therefore, she donates her $20,000 of fund shares in December 2014, notifying the school that she is making her contributions for 2014 and 2015.

With this maneuver, Lynn receives a $20,000 charitable tax deduction for 2014 while avoiding tax on the disposition of the appreciated shares. Meanwhile, the $20,000 she would have sent to the college is still in Lynn’s bank account, so she can use the money to reinvest in assets she believes have investment appeal now.

Simple strategy
The method described here probably will work well for a single $20,000 donation of appreciated securities, as described. All Lynn has to do is get the appropriate account number from her alma mater and notify the fund company to make the transfer by year-end, for a 2014 deduction.

Things would be different, though, if Lynn wanted to make a $1,000 charitable contribution to 20 different charities. To use her appreciated fund shares, she would have to deal with a huge amount of paperwork, getting the information from each charity and forwarding it to the fund company.

In such a situation, you can use a donor advised fund (DAF) to handle multiple transfers with ease. Many financial firms and community foundations offer a DAF.

Example 2: Intending to make multiple donations, Lynn has the fund company transfer her $20,000 worth of shares to a DAF she has specified. If she acts by year-end, Lynn will get the $20,000 tax deduction for 2014, she’ll avoid capital gains tax and she’ll have cash in the bank to reinvest.

After the transfer, the DAF can sell the shares and put the $20,000 into Lynn’s account. Then Lynn (the donor) can advise the fund to send $1,000 to Charity A, $1,000 to Charity B, and so on. Even if this process runs into 2015 and future years, Lynn won’t lose her 2014 charitable tax deduction.

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