How does gifting of securities work?

Let's suppose you are planning to give the Kalamazoo Gospel Mission $2,000. If you are in the 28% tax bracket, your $2,000 gift will reduce your taxes by $560. That is a decent deduction, but you can do better.

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Instead of donating $2,000 in cash, what if you use $2,000 worth of mutual fund shares? You have owned the fund for at least one year and a day. It is going nowhere lately, but the share price is still double what you paid for it.

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If you sold the fund shares to make a charitable donation, you would owe taxes on your gains. (If you realized $1,000 gain, you would owe 20% taxes, or $200. If you donated the remaining $1,800 to KGM, you would get a $504 deduction.)

But supposed that you donated your shares to the Kalamazoo Gospel Mission. You would get a full $2,000 deduction for the donation. In addition, you would avoid paying capital gains taxes.

That amounts to two tax breaks in one!               

How do you donate your security? If you bought your fund through a broker, the process is simple. Call your broker and tell him or her to transfer a specific number of shares to KGM. The broker can handle all the paperwork. If you bought a no-load mutual fund, you have more work to do. Call the mutual fund company and tell the service representative that you plan to donate shares to charity. Ask for a change-of-ownership form. On the form, tell the fund how many shares you want to transfer. You will need to get a signature guarantee form form your bank to authorize the transfer. Once the fund company has received and authorized the form, it will transfer your shares to KGM's account. The share price on the day of the transfer determines the amount you can deduct.

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Charitable deductions for gifts of appreciated securities held for more than one year are generally limited to 30% of adjusted gross income, although any unused amount can be carried forward tof five years.