Evelyn Jacks: Donate Securities – Review Portfolios for Winners and Losers before December

An effective year-end tax strategy is to donate to charity. Investors can do so by transferring qualifying shares to their favorite charity and avoid capital gains taxes by doing so. 

But in addition, this year there is the opportunity to donate under the First Time Donor’s Super Credit. In this case though, you’ll need to contribute cash.

If you qualify as a first-time donor, do that first, perhaps by selling your losing securities and generating a capital loss. You’ll get a donation receipt for making the charitable donation and you’ll be able to use the capital loss to reduce capital gains of the current year first; if excess losses are available, carry them back to offset capital gains in the prior three years or the future.

The Super Credit is lucrative: it add 25% to the normal 15% and 29% federal rates applied to the donations for cash donations up to $1,000. To qualify, neither you nor your spouse may have made a claim for the donation tax credit since 2007.

Now, consider a gift in kind—if you want to give more as a first time donor, or if you are a regular donor. If you sell a winning asset that is held in a non-registered account then take the cash and give it to charity, you must report the capital gain on Schedule 3 of the tax return; it is then either offset by capital losses or 50% of the gain is added into income and taxes are increased as a result.

However, the more tax effective strategy is to gift the securities that have accrued gains in kind to a registered charity, by way of a direct transfer. You will receive a donation receipt for the fair market value of the securities and at the same time, avoid paying tax on the capital gains. 

Review your portfolios well before mid-December to ensure your transactions can be made before the Christmas hiatus.

It’s Your Money. Your Life. Making sure you understand the tax consequences of your charitable giving will help to embellish your gift. Doing so before year end will accelerate the tax benefits so you can give more next year.

Evelyn Jacks is President of Knowledge Bureau and author of 50 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of this year’s three day think tank in Ojai, CA Nov 10-13 will be “Back to the Future – Collaborative Wealth Management.”  Follow Evelyn on Twitter at @EvelynJacks.