Investor Education for Main Street America

Give Wisely

Dec 24th, 2009 | By | Category: 3rd Quarter (Age 40-60)

It is the season of giving and I think it is wise to give as wisely as possible.

Cash is often not the most effective thing to give. Appreciated securities are a more efficient choice.

I know the thought is that the market is down, how could there be appreciated securities out there? Well, you might be surprised to find that there are many broadly diversified US Stock mutual funds that have a year-to-date return in the high 20% to the high 30% range. There are also funds specializing in the Emerging Markets that are pushing 80% for their year-to-date returns.

For those individuals lucky enough to have bailed out of the market before the bottom and then bought back in near the bottom on March 9, 2009, (a strategy I don’t recommend because it usually fails) they should have returns that far exceed those identified above.

So, what’s this got to do with giving? Give away some highly appreciated shares instead of cash. You will avoid the capital gains tax, which, if you have owned the security less than 12 months, will be taxed as ordinary income at your personal income tax rate.

As an illustration, let’s assume you are in the 35% Federal tax bracket and you want to give your favorite charity $10,000.  The charity will get $10,000 and you will get to write off a $10,000 donation that will save you $3,500 in taxes.

But, what if you give your favorite charity $10,000 worth of shares you purchased during the past year instead? The charity gets $10,000 worth of stock, you get to write off the $10,000 donation plus you avoid the income tax you would otherwise pay when you sell those shares.

Let’s assume you have a 50% gain in value. In the case of short-term gains, you would save $1,750 in income taxes and if you wait for long term gains with the 15% capital gains bracket you would save $750 in capital gains taxes.

So, in either case the charity gets $10,000 but on your side of the transaction cash will only get you the charitable deduction; but giving securities will get you both the charitable deduction and the avoidance of some capital gains taxes as well.

If you want to pursue this strategy, hurry. The transaction must be completed prior to January 1, 2010 for it to work for this year’s income tax reporting.

This won’t work if you try to donate from an IRA or other retirement plan. It has to be done from a taxable investment account.

I wish you joyful giving, Merry Christmas and a most happy new year ahead.

“It is more blessed to give than to receive.” – Jesus (Acts 20:35)

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