Sunday, April 22, 2007

Donate Stock to Save Taxes

So you've finished your taxes (or gotten an extension), and you're wondering how to save tax money next year. Here's one easy way.

I've alluded to this in previous posts, but haven't given the details. If you donate money or goods to charity, you get a tax deduction (if your total itemized deductions are high enough to exceed the standard deduction). But if you donate appreciated stock, it's even better.

Say you have stock you bought for $1,000, and now it's worth $2,000. If you sell it and donate the proceeds, you have to pay tax on the $1,000 gain, but you get a deduction of $2,000. However, if you just donate the stock outright, you pay no tax on the gain but you still get the $2,000 deduction. It's like getting a double benefit.

Of course there are certain rules. The most important one is that you must have held the stock for over a year.

To do this, just contact the charity and find out their broker and account number. Then contact your broker and have them transfer the stock directly to the charity. Most brokers will do this, and they have a special form to fill out.

A few specialized brokers, such as my favorite, Interactive Brokers, won't do this. But you can first transfer the stock to a "general purpose" broker that does allow it, and then transfer from there to the charity.

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