Year-end tax planning often involves doing things to reduce your tax bill, and one easy way to get a tax break is to make gifts to charity.
In this segment of Industry Focus: Financials, Motley Fool analyst Gaby Lapera talks with Dan Caplinger, the Fool's director of investment planning, about various methods of charitable giving. In particular, as Gaby and Dan discuss, gifts of appreciated stock can not only give you an itemized deduction but also help you avoid having to pay capital gains tax. Just be sure to give only to legitimate charities, and you'll get the tax breaks you deserve.
A full transcript follows the video.
This podcast was recorded on Nov. 28, 2016.
Gaby Lapera: The next thing I figured we would talk about would be charitable donations -- when giving back gives back to you, haha. OK, I'm not as funny as I thought I was. That's fine.
Dan Caplinger: (laughs)
Lapera: You can give gifts of appreciated stock.
Caplinger: Yeah. Just to give the general gist of this, just about anything that you give to charity is tax deductible, if you itemize your deductions, and if it's given without you getting something back in return. A lot of people ask questions like, "If I participate in some sort of charitable auction or something, and I make a $100 gift and in exchange I get a $100 gift certificate to my favorite restaurant," you're not going to be able to deduct that, because that gift certificate is worth exactly what -- you essentially paid for it. It's not a charitable deduction, even if you bought it at a charity silent auction or something like that. But, if you make gifts at year-end -- and a lot of people do their charitable giving toward the end of the year -- gifts of cash, you write a check, you make a gift by credit card, all of that you will generally be able to deduct, as long as you're itemizing your deductions.
What Gaby was saying before about appreciated stock, that's actually a really great way to give to charity, because it not only gets you, potentially, that tax deduction for the charitable gift, but it also helps you avoid what would ordinarily be a big tax bill for you. For instance, say that you own a stock that has gone up in value from $1,000 to $2,000. If you sold that stock, you would have a capital gain, and you would have to pay tax on that capital gain. But if you give that stock directly to a charity, you get a full deduction for the current $2,000 value, and you don't have to pay the capital gains. The charity will be the one to sell it, they're a tax-exempt organization so they don't have to pay tax on it. Everybody ends up a winner. That's one reason why making gifts of stocks that have gone up in value a lot in your portfolio can be really big tax savers for you.
Lapera: Absolutely. And just to throw in a word about charitable giving, always make sure you check out the charity before you give them anything. You can check charities at Charity Navigator, or CharityWatch. Both of those websites give insight into how charities actually spend your money, so you can make sure that it's actually going toward a worthwhile cause -- or, your gifts of appreciated stock.
Caplinger: The other thing to keep in mind, if you are going to go to stock route, you don't want to wait until the last day of the year to get moving on that. With a check, you just write a check and it's done. But with stock, you really have to work with your broker in order to get the shares that you own in your brokerage account over to your charity. That can take days, or even a couple of weeks. A lot of brokers will tell you, "If you're going to do this, let me know early in December so that we can get everything moving in the right direction, and there's no question later on that you got it done before year-end." If the important activity involved in getting those shares moved out of your account doesn't happen until 2017, the IRS can come back and tell you, "You don't get to claim that on your 2016 tax return. You're going to have to wait until 2017 to get it," which is not what you want. You want to get it done now so you can claim that deduction now.