Giving away stocks, bonds or mutual funds to charity can be a great way to reduce your tax burden without having to lay out cash, says Robert DiQuollo, CFP, CPA and President of Brinton Eaton Wealth Advisors, a boutique wealth advisory firm based in Madison, NJ.
Your tax deduction is based on what the security is worth today, not what it was worth when you bought it. So, if your shares in ABC Company went from $1,000 to $5,000, you’ll get a $5,000 deduction on your federal income tax if you’re able to itemize deductions. In some states, it will also reduce your state income tax too.
It’s best to give away only securities that have appreciated in value. And always give any appreciated securities directly to the charity.
“If you sell it yourself, and then give away the cash, you’ll pay a capital-gains tax and that defeats the entire purpose of getting two tax benefits—a tax deduction plus avoiding the capital gains tax,” he says.
Give away clothes and goods—but document it thoroughly
You can still get a deduction by giving away goods to a charity—but the rules are stricter now. Donated property like clothing, furniture, electronics and appliances now must be in “good condition or better” to qualify for a deduction.
A receipt from a charity stating “3 boxes and 3 bags of clothing” won’t be adequate. You need a detailed list showing each item. “If you’re audited, you’ll have to prove that the property you donated wasn’t junk, so taking pictures of it with your digital camera is a smart idea,” DiQuollo says.
If you claimed a total deduction of more than $500 for all contributed property, you must file Form 8283 with your tax return and provide the name and address of each charity and describe the items you contributed.
For contributions of property worth more than $5,000, except publicly traded securities, you must obtain a written appraisal, and your Form 8283 must be signed by both the appraiser and the charity.
If you claimed a deduction of more than $500 for donating your car, make sure the charity gives you a Form 1098-C (contributions of motor vehicles, boats, and airplanes). You must file this form with your federal tax return.
Give it away to your kids or grandchildren
If you’re one of the lucky ones with an estate big enough be hit with estate tax, consider giving some of your money away to your family. The IRS allows annual gifts of $13,000 to as many individuals as you like, with no tax consequences. For instance, if you have three children, you can give them each $13,000 for total gifts of $39,000. You can also give their spouses each $13,000, bringing the total to $78,000.
If you’d like the money to be put away for your children or grandchildren’s education, consider setting up a 529 plan and contributing the $13,000 to the plan.
There is no limit on the number of non-taxable gifts you give, as long as the total gifts to each recipient do not exceed the allowed amount.
Or perhaps you’d like to pay tuition and/or medical expenses for your children and or grandchildren. These gifts can be made and not count toward the $13,000 annual limit, DiQuollo points out.
About Brinton Eaton
Based in Madison, NJ, Brinton Eaton is an elite, boutique advisory firm with a rich history of serving affluent individuals and their families across multiple generations. The firm helps affluent clients protect, grow, administer and ultimately transfer their legacy of wealth through a full range of integrated services, including lifetime cash flow projections, financial, tax, estate and retirement planning, investment management, charitable giving and business succession planning. Brinton Eaton’s clients tend to be corporate executives, professionals, entrepreneurs and retirees with investable assets over $2 million. For more information, visit HYPERLINK “http://www.brintoneaton.com” www.brintoneaton.com.
