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Giving stocks to charity
pays a dividend in taxes

NOW that the holidays are here, you may be considering making a gift to a charitable organization. Of course, your generosity will be greatly appreciated by the group you're supporting -- and it can pay off for you, too.

When you make a gift to a charitable group, you can get some significant tax benefits. Let's take a look at them:

» Immediate tax deduction: You can deduct all or part of your charitable gift from your current income taxes, even if your original cost was only a fraction of today's value. (The size of your deduction depends, in part, on whether you give cash or some other type of financial asset, such as stocks. Generally speaking, your maximum deduction will be limited to 50 percent of your adjusted gross income. Anything over that amount can be carried over to future years.) You can deduct financial contributions to religious, charitable, scientific, educational and literary institutions, as well as other groups that are incorporated as 501(c)(3) organizations. Upon making your gift, make sure you get a receipt that lists the name of the organization and the date and amount of your contribution.

» Avoidance of capital gains taxes: If you have stocks that have grown significantly in value over the years, you may want to donate them to a charitable group. You will avoid the capital gains taxes you'd have to pay if you sold the stock.

To illustrate the benefit of giving appreciated stocks to a charity, let's look at an example. Suppose you bought stock 10 years ago for $7,000, and it is now worth $10,000. If you are in the 28 percent tax bracket, and you give this stock to Charity XYZ, you can deduct $2,800 from your taxes, and you'll pay no tax on unrealized capital gains. Consequently, your $10,000 gift will really only "cost" you $7,200 out of pocket.

Which stocks should you donate?

You may have a variety of appreciated stocks that you could donate to a charitable group. Which are the best ones to give?

There's no one "right" answer. But here are a couple of guidelines you might want to consider:

» Seek portfolio balance: At all times, you need to keep a balanced portfolio that reflects your risk tolerance, your time horizon and your long-term goals. So, before you give away any stocks, make sure that your gift doesn't throw your holdings "out of whack" to the extent that you are either taking on too much risk or reducing your prospects for growth.

» Look for dividends: If you aren't jeopardizing your portfolio balance, you may want to consider donating appreciated, low-dividend paying stocks and replacing them with stocks that have historically paid, and increased, their dividend payouts. Thanks to recent tax law changes, stock dividends are now taxed at a maximum of 15 percent; previously, these dividends were taxed at your current tax rate. (Keep in mind that stocks are subject to market risks and may not always pay dividends.)