Investing: Save on taxes with charitable stock donations
— -- For investors, 2011 has had all the charm of a box of gnats. You can make a bad year a bit better — and even make the world a bit better, too — by making some smart tax moves.
An easy way to save money at tax time is to donate something to charity. But investors can double their tax goodness by giving appreciated stocks or mutual fund shares.
Let's say you bought 100 shares of Fly By Night, a fictional company that specializes in cut-rate red-eye flights to California. The shares cost $50 apiece, or $5,000, when you bought them in 2008.
The shares have soared to $75, or $7,500, so you have a gain of $2,500. If you sell the shares, you'll owe long-term capital gains taxes on your gain. Long-term gains are taxed at 15%, so you'd owe Uncle Sam $375. Short-term gains — those on assets held less than a year — are taxed at your ordinary income tax rate.
If you wanted to delay the day of reckoning, you could wait until the first trading day of January. Your tax would then be due in April 2013, rather than April 2012.
A better move, if you can afford it, is to donate your shares to charity. You'd sidestep capital gains taxes entirely, and get a charitable deduction of $7,500. If you're in the 25% tax bracket, you could shave $1,875 from your tax bill.
Most major charities are well-equipped to handle a transfer, but don't wait until Dec. 31 to get things rolling. Even charities used to taking donated securities can slip up from time to time.
A more streamlined alternative is a donor-advised fund. Essentially, you create an account at a donor-advised fund and, provided you fund the account by Dec. 31, you can deduct your entire donation from your 2011 taxes. You can then invest the money among several choices and instruct the fund to distribute money to approved charities at any time.
"Approved" means a real charity that won't get you or the fund in trouble with the IRS. You can't use distributions to send your kid to camp, buy a puppy or help elect someone president.
If you're going to donate appreciated securities to a charitable gift fund, it makes sense to open your account with the brokerage or fund firm that you use. Transfers are easier and faster. Fidelity Charitable, for example, can accept gifts of mutual fund shares held in Fidelity accounts until Dec. 31. The company suggests you start the process on Nov. 25 if you want to donate fund shares held at another company.
Fortunately, many fund companies and brokerages do have donor-advised funds. Fidelity, Schwab, Vanguard, the American Funds, and Franklin Templeton all offer donor-advised funds, just to name a few.
Don't donate shares that have fallen below your purchase price. Sell them. You can use your loss to offset any amount of capital gains. If you have more losses than gains, you can deduct $3,000 of your losses this year and carry forward any balance into the next tax year. Losses in IRAs and 401(k) plans, unfortunately, aren't deductible.
You can't repurchase the same fund or stocks within 30 days, or you'll incur a wash sale — which means the IRS will disallow your loss.
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