Tax-smart charitable giving

The holidays are a great time of year to consider making charitable gifts. This is especially true this year when so many people face severe economic and emotional stress caused by the COVID-19 pandemic. In fact, the Community Foundation has already given more than $3 million in grants from its COVID-19 Relief Fund and the need continues.

One of the great side benefits to philanthropic giving is the ability to deduct the value of your charitable gifts from your taxes. You can magnify the tax benefit of charitable giving by donating appreciated shares of common stock, mutual funds or exchange-traded funds instead of cash, but you need to be careful. As with so many things, the IRS has very specific guidelines on how to do this correctly. Here’s how it works.

When you give stock as a gift, your original cost basis transfers to the recipient. If the recipient is a tax- exempt organization, it can sell the donated shares without paying tax on any capital gains. You, as the donor, get a tax deduction equal to the full market value of the donated stock and you completely avoid paying tax on the capital gain. If you really like the stock you donated and want to maintain your position, you can replace the donated shares using the cash you would have otherwise donated to the charity. The end result is a portfolio identical to the portfolio before the gift was given but without the embedded capital gains. In order for this strategy to work properly, you need to keep three things in mind.

First, make sure your donation is going to a qualified nonprofit and that the nonprofit provides you with a “contemporaneous written acknowledgment” of your donation. The acknowledgment must include

1) a description of the property you donated, 2) whether you received any goods or services in exchange for the donation, and 3) an estimate of the value of your donation. Without this acknowledgment, you will not be able to deduct your donation.

Second, donate stock only if it has appreciated in value. The benefit to the strategy comes from avoiding the tax on the capital gain. If the stock is trading at a loss, you would be better off selling the stock and donating the proceeds of the sale. You would still be able to deduct the charitable contribution from your taxes and you would still be able to use the realized capital loss to offset future capital gains.

Third, donate stock only if you have held it for more than one year. If you donate stock held less than one year, the IRS limits your charitable deduction to your cost basis in the stock, not the full market value. Your financial adviser should be able to help you identify which of your stocks are prime candidates for charitable donations.

The IRS allows the donation of other types of property, as well, but the rules governing tax deductions differ depending on the kind of property involved. For a complete rundown, check out IRS Publication 526: Charitable Contributions. You can get it online at www. IRS.gov.

You will also want to work with your intended charity to understand their procedures for receiving donations of appreciated assets. Not all nonprofits are in the position to accept all types of assets, though most are able to accept appreciated stock. If you have other assets you want to donate, you might want to consider working with The Community Foundation for Monterey County. They can accept donations of a broad array of asset types including cash, stock, real estate, collectibles, and even oil and gas rights.

Barry Dolowich is a certified public accountant and owner of a fullservice accounting and tax practice with offices in Monterey. He can be reached at 372-7200. Please address any questions to Barry at PO Box 710 Monterey, CA 93942 or email: bdolowich@gmail.com.