(Bloomberg News) Taxpayers looking to maximize their charitable deductions and save on taxes can replicate a strategy Republican presidential candidate Mitt Romney uses.
By donating stock directly to a foundation, Romney and his wife Ann eliminated taxes on gains, received a deduction for the securities' full market value and can donate the money to multiple charities over many years, said Steven Bankler, a former investigative accountant for the U.S. Senate.
Individuals can achieve similar results with a donor- advised fund for a "whole lot cheaper," said Bankler, a certified public accountant in San Antonio, Texas.
"Unsophisticated investors and taxpayers typically sell assets and then donate the proceeds to charity so they pay tax on the gain and then get a charitable deduction," said Bankler.
The Romneys donated about $7 million to charity in the past two years, documents the campaign released last week show. The couple had deductions for more than $2 million in donations that are listed as noncash charitable contributions. That includes tens of thousands of shares of stock in Domino's Pizza Inc., Sensata Technologies Holding NV, Dunkin' Brands Group Inc. and Warner Chilcott Plc that went to their family's Tyler Charitable Foundation, based in Boston.
A donor-advised fund is an alternative to giving directly to a charity or setting up a foundation. It enables benefactors to give assets, including appreciated stock, to a central source and get an immediate tax deduction. Donors also retain advisory rights over their accounts. They can choose investments and direct distributions to public charities over many years.
Better Than Checks
Assets in donor-advised fund accounts reached almost $30 billion in 2010, an increase of about 12 percent from the prior year, according to a December report by the National Philanthropic Trust, a public charity and national provider of donor-advised funds based in Jenkintown, Pennsylvania.
Giving appreciated stock directly is better than writing a check because individuals generally receive a larger charitable deduction and make the donation with pretax dollars, said John O. McManus, principal of the law firm McManus & Associates in New Providence, New Jersey, and Manhattan, whose clients include those in the hedge-fund and private-equity industries.
If someone bought a share of stock for $1 and it's now valued at $100, they would have a $99 gain when selling, McManus said. That means they may pay about $20 in state and federal capital-gains levies and if they donated the after-tax proceeds, that leaves them with an $80 charitable deduction. If they gave the share worth $100 directly, it may generate a $100 deduction and the foundation or donor-advised fund could liquidate the position without paying tax, thus keeping more assets to spend on its charitable endeavors, he said.
Taxpayers contributing securities to donor-advised funds should understand that the tax treatment may differ depending on how long they've held the shares of stock, said Gaines Norton, a certified public accountant in Snowmass Village, Colorado. With assets held less than a year, individuals may only receive a charitable deduction for the original price of the securities, not any gains, Norton said.