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Take advantage of tax-smart philanthropy by donating appreciated stock

Today is National Philanthropy Day, created to recognize those who strive to make life better for others.

The term philanthropist usually conjures up rich people holding fancy galas attended by their wealthy friends to raise money for various causes.

But you don't have to be rich to be a philanthropist, or a good-deed-doer as The Wizard of Oz called such folk when he stumbled over the fancier moniker.

Wizard of Oz gives the Tin Man a heart_testimonial_MGM_Tom-Margie via Flickr
"Back where I come from there are men who do nothing all day but good deeds. They are called phil … er … phil … er … er … good-deed-doers and their hearts are no bigger than yours, but they have one thing you haven't got. A testimonial! Therefore, in consideration of your kindness, I take pleasure at this time in presenting you with a small token of our esteem and affection. And remember, my sentimental friend, that a heart is not judged by how much you love, but by how much you are loved by others." (The Wizard of Oz, 1939, Metro-Goldwyn-Mayer)

Myriad donation options: And you don't have to give just cash, which in Internal Revenue Service terms includes not only actual dollars or writing a check, but also donating via a credit card or text message.

You can give household goods that are in good shape, but that you no longer need.

You can volunteer.

Or, if like most rich individuals, you happen to have some investments, you can give some of those assets to your favorite charity.

Donating appreciated assets: In addition to helping out your nonprofit of choice, your charitable gift of appreciated stock can be a good financial and tax move for you.

It allows you to rebalance your portfolio and dispose of assets that no long fit your overall, long-term plan without producing a tax bill for you.

Here's what you need to consider.

First, take a hard look at your portfolio, something you should do at least once a year. Do you have holdings that have done well, but really don't fit your financial/investment needs now?

Rather than sell them and face capital gains tax on the profit, give them to a charity. Most accept such gifts. And it's a twofer.

The charity is able to sell the stock without facing any tax ramifications and use the money where it needs it.

And you, the donor, also will avoid a tax bill.

If you can sell the stock, donate the money you get from it and then give that money to a charity, yes, you can deduct it if you itemize. But you'll also have to pay capital gains tax -- 15 percent for most people, 20 percent for those in the top tax bracket -- on your sale profit.

But by donating the appreciated stock directly, you still get a charitable deduction on Schedule A that's equal to the value of the stock on the day you donated it. And no tax bill from Uncle Sam.

Even better, the wash rule doesn't apply here. This tax provision prevents you from selling a stock just to book the tax loss and then rebuying it or a substantially similar one within 30 days before or after the sale.

But when you sell for a gain, you can rebuy the same or similar stock at any time. And if your stock has grown a lot since you first bought it, you reset your basis at the higher level, making any future gains and tax bills lower.

Applies only to gains: You've probably noticed that I keep using the word appreciated. This is key. You want to give an asset that's increased in value.

The obvious reason, discussed above, is that you want to get rid of the holding without incurring a tax bill.

If, however, your portfolio analysis indicates that it's time to dump a stock that's lost value, you're better off selling the bad investment and using the loss against any gains. Or, if it's more than your profits this tax year, using up to $3,000 of the loss amount to offset your ordinary income.

You can still give to you charity, and deduct that gift, from your other funds.

Long-term assets only: Finally, make sure that you've held the appreciated stock that you're donating for more than a year.

This makes it a long-term capital gains asset. As such, you get to deduct, as noted earlier, the stock's fair market value when you donate it.

If, however, you donate a stock you've owned for a year or less, your deduction is limited to your cost basis -- that's basically what you paid for the stock -- and not the asset's current value. That means you're leaving a lot of tax deductibility on the table.

Timing is key: As with all charitable gifts, the tax break applies to the year in which the gift is given. So if you want to get a deduction for your appreciated stock gift this year, donate the asset by Dec. 31.

However, in this case you can't wait until the very last day of the year.

While most charities will gladly accept stock gifts, they have a system in place to do so. You need to worth within that. And that usually takes time.

So contact your chosen charity for details and get the process going so that the gift is made in plenty of time to make your favorite nonprofit, your tax preparer and you happy.

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Comments

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South Texas Vocational Technical Institute

I think it is great that philanthropists get tax breaks. They should get something back.

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