Mitt Romney strategy could help maximize charitable tax deductions

February 4, 2012

Taxpayers looking to maximize their charitable deductions and save on taxes can replicate a strategy Republican presidential candidate Mitt Romney uses.

By donating stock 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 charities over several years, said Steven Bankler, a certified public accountant. Individuals can achieve similar results with a donor-advised fund for a “whole lot cheaper,” he said.

People “typically sell assets and then donate the proceeds to charity so they pay tax on the gain and then get a charitable deduction,” he said.

The Romneys donated about $7 million to charity in the past two years, documents show. The couple had deductions for more than $2 million in donations that are listed as noncash charitable contributions. That includes thousands of stock shares in Domino’s, Sensata Technologies, Dunkin’ Brands and Warner Chilcott that went to their family’s Tyler Charitable Foundation.

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.

Assets in donor-advised fund accounts reached almost $30 billion in 2010, an increase of about 12 percent from a year before, according the National Philanthropic Trust.

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.

If someone bought a share of stock for $1 and it’s now valued at $100, he would have a $99 gain when selling, McManus said. That means he may pay about $20 in state and federal capital-gains levies and if he donated the after-tax proceeds, that leaves him with an $80 charitable deduction. If he 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, McManus 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. With assets held less than a year, individuals may receive a charitable deduction only for the original price of the securities, not any gains, Norton said.

Firms that sponsor donor-advised fund programs include Fidelity Charitable, Schwab Charitable and Vanguard Charitable.

Donations of appreciated securities were 71 percent of contributions to Fidelity Charitable last year, compared with about 51 percent in 2010, said Sarah Libbey, president of Fidelity Charitable. The increase was due in part to improved market conditions, Libbey said. The Standard & Poor’s 500-stock index returned 2.1 percent with dividends reinvested last year.

When individuals give stock to donor-advised funds, the shares generally are liquidated.

For a $10 million account, Vanguard Charitable charges as low as 25 basis points in fees for administration and investments, said Ben Pierce, president of Vanguard Charitable. By comparison, the Romneys’ Tyler Foundation, which had a value of about $10 million at the end of 2010, reported operating and administrative expenses of about 53 basis points of assets, or about $53,000, according to documents.

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