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Donating appreciated assets to your favorite charity

Economic wonks have gathered in Washington, D.C., or if they can't travel to the nation's capital, around their video screens and/or television business news channels.

The reason? Today marks the beginning of the final Federal Open Market Committee (FOMC) meeting of the year. The Federal Reserve members will issue a statement on their decisions tomorrow afternoon.

We all know what that means. The stock market will be, at best, erratic while the Fed folks are in session. Investors are nervously anticipating any indication as to exactly when the Fed will dial back its monetary stimulus.

In early trading today, stocks fell fractionally. That, along with the usual year-end profit taking, capital gains loss harvesting and general portfolio adjusting means that market watchers will be busy.

But the lovely holiday song Silver Bells makes me think of another reason why now is a good time to make some specific asset moves.

This is the song that, whenever and wherever I hear it, officially signals for me the beginning of Christmas. 

And from a Christmas Tax Tip Tunes perspective, Silver Bells reminds me of a nice, shiny investment that's done well and the option of donating it to charity.

A different type of donation: Most of the time when we have a stock that's done and doing quite well, we hang onto it. No need to mess with success.

Or if we need the cash and have held the asset for more than a year, we sell it and pay the lower capital gains tax rate on our investment's nice return.

But sometimes, a stock or other asset just doesn't fit our investment plan despite how well it's done. In that case, consider giving the appreciated asset to your favorite charity.

The key here is to give away a property that you've owned for more than a year. The charity can use it as it sees fit and get a twofer tax break.

First, you avoid any capital gains tax on the donated asset's appreciation.

Second, if you itemize you can deduct the asset's value at the time of the donation.

Dollar difference by donating: Why not just sell the asset, you ask, and then give the money to the charity? Wouldn't that make things easier for the nonprofit?

As to the first question, if you sell the long-term asset yourself, you'll have to come up with the taxes due on your capital gains.

Say, for example, you have a stock that's gone from being worth $1,000 when you bought it two years ago to $2,000 today. If you sold the stock, you'd owe capital gains tax on the $1,000 profit (I'm using simplified basis/profit amounts for illustrative purposes) at either the 15 percent or, if you're a higher-income earner, 20 percent. That would cut $150 or $200 out of the $2,000 that you would be able to donate to your charity.

As for question number two, most major nonprofits are equipped to deal with stock donations. The asset can be added to the organization's holdings and sold later when the group might have more of a need for the money. Or the organization can sell it immediately.

So you're actually giving the charity more of a money managing choice. And trust me, the group would rather have the full $2,000 that the asset is worth rather than the $1,850 or $1,800 you have after the sale minus taxes. The extra amount can make a difference to a nonprofit.

Follow all the tax rules: Remember that property you donate must be a long-term asset. That is, you've owned it for more than a year.

If you give away property you've owned for a year or less, you only claim a deduction on the price you paid for it. In the example above, that would the $1,000 purchase price instead of $2,000 appreciated value.

You also must follow other charitable donation tax rules, such as giving to a qualified charity and documenting your gift.

And there are special rules for appreciated property other than the standard stocks, bonds, other securities or real estate.

Internal Revenue Service Publication 561 offers an idea of what's involved in the donation of gems, jewelry, art and antiques. Your best bet, however, if you're donating these more specialized type of assets is to hire a tax adviser with experience in this area.

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