When you have appreciated stock or stock mutual funds and you want to gift them to charity, you can easily do so. But you also have to consider whether that is the best choice and whether you will get the kinds of tax breaks you are hoping for. In some cases you may find that the expected tax deduction is not what you can actually take, and that there may be better ways to gift money that allow for larger deductions or a better financial picture. Here are three things to consider before you gift mutual funds to charity.
When you have held mutual funds for 12 months and one day or longer, you can gift them and receive a tax deduction up to 30% of your AGI (adjusted gross income). If you have held these funds for fewer than 12 months you are limited to 50% of your AGI as a deduction. The deduction can also be carried forward for a period no longer than five years.
Having mutual funds for a short period of time and then gifting them to charity can be problematic, especially if these funds have risen significantly in value very quickly. During the first year of owning these funds you can only receive a tax deduction equal to the value of the original purchase, not equal to what the funds are worth when you gift them. Naturally, that can be problematic for large donations where the mutual funds have gone up significantly in value quite quickly.
Keep in mind that only people who itemize deductions are going to be able to deduct that donation when it comes to the IRS. Not everyone itemizes their deductions or needs to do that, so think carefully about whether gifting mutual funds is the right thing to do. In some cases, it may be better to choose another type of gifting option so the charity gets the maximum amount of help and you get the best possible tax deduction in the process.
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Your Guide to Financial Independence
Rick Epple, CFP(r), CeFT(r)