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Posted: December 02, 2013

Year-end advice for the charitable investor

Maximize giving, minimize taxes

Wayne Farlow

This is the time of year when we show gratitude for the abundance with which we are blessed. It is also when many charitably minded individuals begin to consider their year-end charitable contributions. If you are charitably minded and wish to maximize the funds available to support your favorite charitable organizations by minimizing taxes, there is a simple approach that accomplishes both.

To maximize the funds available for charitable giving, get a double tax break by setting up a Charitable Giving account that provides a Donor Advised Fund.  Donor Advised Funds are qualified, private, non-operating foundations, that pool their donations and allow the owner to select their favorite charities for gifts. The donations can be as little as $50 and may be given to any qualified charitable organization.

Giving appreciated long-term capital gain securities (stocks, mutual funds, ETFs, etc.), to a charitable organization, provides a double tax savings.  The full market value of the appreciated security receives an immediate charitable deduction and no capital gains taxes are owed on a security’s appreciated value.

Giving small amounts of appreciated securities to multiple organizations can be cumbersome and time consuming.  Charitable Giving accounts help solve this problem.  A Charitable Giving account can be established at most large the brokerage firms, including Schwab, Vanguard and Fidelity.  Once a Charitable Giving account is established, appreciated long term securities may be donated by simply moving the security from a taxable brokerage account to the Charitable Giving account

When an appreciated security is donated, its full market value becomes an immediate tax deduction.  These funds are then deposited into the Donor Advised Fund.  Gifting from the Donor Advised Fund may be done immediately or at any time in the future. Regardless of when the Donor Advised Fund assets are actually gifted, the full value of the donated security is immediately deductible.

As an example, Joe brilliantly bought 50 shares of Apple stock in December 2008 at $100 per share.  He now wishes to sell his stock, but would prefer to not pay the long-term capital gains taxes on the profit.

Apple is currently trading at approximately $525/share. Joe’s $5,000 investment in 2008 is now worth $26,250.  Joe is charitably minded and in a high federal tax bracket. By donating his Apple stock to his Donor Advised Fund, he receives a 2013 charitable deduction of $26,250.  His donation also allows him to avoid the requirement of paying  taxes on his $21,250 capital gain (up to $5,079 in taxes at the maximum 23.9% rate).

If Joe wishes to continue to own Apple stock, he could gift the stock to his Donor Advised Fund and immediately buy 50 shares of Apple stock.  Joe’s cost basis is now $26,250 instead of $5,000.  Since the Apple stock is being gifted and not sold, “wash sales” rules do not apply. Joe has increased the Apple stock’s basis while taking advantage of the double tax break.

Charitable foundations are impractical for most people due to their high overhead and legal expenses.  With a Donor Advised Fund, one creates a “mini charitable foundation” with none of the headaches.  The “mini foundation” can even be passed on to future generations

With the market appreciation of 2013, everyone with a taxable brokerage account should have appreciated stocks and mutual funds.  Gifting to a Donor Advised Fund provides an immediate tax deduction and protects the equity’s gain from ever being taxed. If year-end charitable giving is in your plans, contact your financial adviser today to learn more about the benefits of opening a Charitable Giving Account.

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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