Charity Donation of Stock, Part 1

Your investments performed great last year. After all, the U.S. stock market did exceptionally well. As we enter tax season, the other side of the equation comes to your mind. If your investments are in a taxable account, you’ll owe taxes on your gains. One nice thing is that you don’t have to worry about it until you “realize” your gains, meaning, until you actually cash out your winning position. While the delay is nice, it can also create a ticking tax bomb. There is a way out.

Consider this scenario:

You have a stock in your taxable account that has doubled its value. You think it's time to sell, but you don't want to take the tax-hit next April. You’ve heard me say that you shouldn’t let the tax-tail wag the investment-dog. That’s all well-and-good, you think, but isn’t there a way I can get out of the stock position and not have such a heavy tax burden?

Looking over your taxes, you notice that you really need a deduction this year, even without considering the capital gain that you might end up with from the stock sale you’re contemplating. One way to get a tax deduction is by giving money to a charity. You, being the civic-minded and generous person you are, know of several charities that you’d be happy to support. Your gains mean that you have the money to give.

Wouldn’t it be nice to be able to have your cake (gains) and eat it too (not pay taxes on them) and even share the cake with others (give to your charity)? Yes it would be nice and this dream is actually a reality.

All you have to do is to gift the stock you have in your portfolio, the one with the huge gain, instead of cash, to your charity of choice. As long as you have held the security more than a year, you won’t owe any taxes on the capital gains that are imbedded in your gift. At the same time you still get to take the full current value of the stock you are gifting as a tax deduction.

You’ll need to contact the charity to see, but most of them have a brokerage account set up just for this purpose. You’ll get that information to your broker who will arrange for the transfer. Of course there will be some paperwork, and the normal warning that you should contact your tax and financial advisor prior to doing this applies.

There you have it. A way to be philanthropic now, take some of the gains from your portfolio tax-free, and get a tax deduction to boot. But there is more. You might have a charity that you want to give to, but not all at once. You’d rather spread your donation across a few years—but you want your whole tax deduction this year and you want out of that stock now.

Yes, my friends, there is a way to do that, but you’ll need to wait until next week to find out what it is.

This article was published under the title "Donating can ease 'ticking tax bomb'"

in the Wichita Falls Times Record News on February 16, 2014.