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Do good and double your tax break


As the year ends, many of us will be sharing our abundance with those who are not as fortunate, through year-end charitable giving.  If you hurry, you can still get a double charitable tax deduction, while setting up your own, no-cost “charitable foundation.”  If you are planning on making charitable year end gifts to claim a 2012 tax deduction, now is the time to establish a Donor Advised Fund.

Donor Advised Funds are qualified, private, non-operating foundations that pool their donations and allow donors to select their favorite charities for gifts. The gifts can be as little as $50 and may be given to any qualified charitable organization.  Like a charitable foundation, funds donated to a Donor Advised Fund may be invested within the fund and can be used for charitable gifts many years in the future.

A Donor Advised Fund may be used to gift appreciated stock to multiple charitable organizations.   Giving appreciated long-term capital gain stock to a charitable organization provides a double tax savings.  The full market value of the appreciated stock receives an itemized charitable deduction plus no capital gains taxes are paid on the donated stock’s appreciated value.

Giving small amounts of stock directly to multiple organizations can be both cumbersome and time consuming.  Donor Advised Funds are a solution to this problem.  A Donor Advised Fund account can be established at Schwab, Vanguard or Fidelity as well as at many other brokerage firms. If the account is established before year end, you may donate appreciated long term stock to the account and receive the full market value of the stock as a 2012 tax deduction.  Even if the value of the donated stock is not gifted in 2012, the full market value of the donated stock qualifies for a 2012 charitable deduction.  Gifting of the funds may be done at any time in the future.

Here is an example of how a Donor Advised Fund works.  Assume that you brilliantly bought 50 shares of Apple stock in December 2008 at $100 per share.  You now wish to sell this stock, but would prefer not to pay the long term capital gains taxes on the profit.

Apple is currently trading at approximately $525/share. The $5,000 investment in 2008 is now worth $26,250.  Donating this stock to a Donor Advised Fund would provide a 2012 charitable deduction of $26,250.  This donation would also avoid the requirement of paying capital gains taxes on the $21,250 capital gain ($3,187.50 in taxes at the 15 percent rate).

If you wish to continue to hold Apple, you could gift the stock to your Donor Advised Fund and immediately buy 50 shares of Apple stock.  This approach provides a new cost basis of $26,250.  Since the Apple stock is being gifted and not sold, the “wash sales” rules do not apply. This approach increases the stock’s basis while significantly increasing the after tax value of the charitable gift.

Donor Advised Funds are similar to having your own charitable foundation.  Charitable foundations have high overhead and legal expenses, making them impractical for most people.  Donor Advised Funds provide a “mini charitable foundation” with none of the associated headaches and expenses. 

The value of the stock donated to a Donor Advised Fund remains in the fund until it is gifted.  The funds in a Donor Advised Fund can be invested to grow in value over time and may even be passed on to future generations for their charitable giving.  If a Donor Advised Fund seems right for you, contact your financial adviser today to get your Donor Advised Fund account established and funded before the end of 2012.

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Wayne Farlow

Wayne Farlow is the founder of Financial Abundance, LLC, a Registered Investment Advisor firm.  He is a Certified Financial Planner (CFP®), focusing on Retirement Planning, Investment Management, Small Business Owner Planning and Sudden Wealth/Inheritance Planning.  His book, “Financial Abundance Guide,” is available free at www.farlowfinancial.com .  He can be reached at wayne@farlowfinancial.com or at 303-554-0309.

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