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How to donate stock to charity and get a tax deduction
A donor-advised fund is an alternative to giving directly to a charity or setting up a foundation.
NEW YORK — Taxpayers looking to maximize their charitable deductions and save on taxes can replicate a strategy that Republican presidential candidate Mitt Romney uses.
By donating stock directly to a foundation, Romney and his wife, Ann, eliminated taxes on gains, received a deduction for the securities' full market value and can donate the money to multiple charities over many years, said Steven Bankler, a former investigative accountant for the U.S. Senate.
Individuals can achieve similar results with a donor-advised fund for a "whole lot cheaper," said Bankler, a certified public accountant in San Antonio.
A donor-advised fund is an alternative to giving directly to a charity or setting up a foundation. It enables benefactors to give assets, including appreciated stock, to a central source and get an immediate tax deduction. Donors also retain advisory rights over their accounts. They can choose investments and direct distributions to public charities over many years.
Giving appreciated stock directly is better than writing a check because individuals generally receive a larger charitable deduction and make the donation with pretax dollars, said John O. McManus, principal of the law firm McManus & Associates, whose clients include those in the hedge-fund and private-equity industries.
If someone bought a share of stock for $1 and it's now valued at $100, they would have a $99 gain when selling, McManus said. This means they may pay about $20 in state and federal capital-gains levies and if they donated the after-tax proceeds, that leaves them with an $80 charitable deduction.
If they gave the share worth $100 directly, it may generate a $100 deduction and the foundation or donor-advised fund could liquidate the position without paying tax, thus keeping more assets to spend on its charitable endeavors, he said.
Taxpayers contributing securities to donor-advised funds should understand that the tax treatment may differ depending on how long they've held the shares of stock, said Gaines Norton, a certified public accountant in Snowmass Village, Colo.
With assets held less than a year, individuals may only receive a charitable deduction for the original price of the securities, not any gains, Norton said.
Firms that sponsor donor-advised fund programs include Fidelity Charitable, Schwab Charitable and Vanguard Charitable. All three are nonprofits affiliated with their namesake financial-services companies.
When individuals give stock to donor-advised funds, the shares generally are liquidated, said Sarah Libbey, president of the nonprofit Fidelity Charitable. Clients may then invest the money in a variety of funds or, if the account is managed by an investment adviser, in individual securities, she said.
Both Fidelity and Vanguard charge a brokerage commission to liquidate shares when donors contribute them to their accounts. That fee usually is $2 per stock trade for those using Vanguard Charitable, said Ben Pierce, president of Vanguard Charitable.
Sponsors of donor-advised funds usually provide the legal, recordkeeping and accounting services, which generally results in lower startup costs and administrative burdens compared with a private foundation, according to a December report by the Treasury Department.