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Financial Advice Corner

Avoiding Capital Gains Tax

Did you know that if you donate stocks or mutual funds instead of cash you can avoid capital gains tax? Here is how.

Instead of selling your investment and donating the cash, donate the investment directly. Whatever amount you were planning to donate, do it in stock or mutual funds. This is a simple process. The charitable organization supplies you with the name and number of an investment company where they have an account that can accept stock market-based investments. You instruct your financial institution to transfer directly from your account to the account in the charity and that it is a charitable donation. Note the value of the shares on the day and time of the transfer.

Here is an example: Say you are holding a stock that is worth $100 per share but you only paid $40 per share several years ago. If you sell the stock you will owe capital gains tax on the gain which is $60 per share. Capital gains tax is 15% for most taxpayers. So you will pay $9 in long-term capital gains tax. This leaves you $91 to donate from that share of stock. So you will only get $91 of charitable contribution deduction. And the charity of your choice gets less donation. This does not sound like a big deal on one share of stock but if you are planning on donating $5,000 which is 50 shares of that stock you would pay $450 in capital gains tax and get $450 less in charitable donation tax deduction. In contrast, if you donate that 50 shares of stock by direct transfer to the charity then you get the full $5,000 in charitable deduction and you don’t pay the $450 in capital gains tax. You also save the cost of the sales commission to sell the stock. This example is with the long-term capital gains tax rate. If you have held an investment for less than a year it would be taxed at the short-term capital gain tax rate which is much higher. So that is even more tax advantageous to you.  ~  By: Melodie Brier

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