How to Donate Mutual Funds to Charity

Donating mutual funds directly to a charitable organization is an alternative to giving cash. This method involves transferring ownership of the fund shares from your investment account to the charity’s account, allowing you to support a cause without first liquidating your holdings. The process is a transfer of property, not a monetary transaction, and requires coordination between you, your financial institution, and the charity.

Tax Implications of Donating Mutual Funds

The financial advantage of donating mutual funds relates to capital gains and tax deductions. When you donate shares held for more than one year, you can claim a charitable deduction for the full fair market value (FMV) at the time of the donation. You also avoid paying the capital gains tax that would have been due if you had sold the appreciated shares.

Your cost basis is what you paid for the shares, while the FMV is their current price. The difference is the capital gain. By donating the shares, you eliminate your capital gains tax liability, and the tax-exempt charity does not pay the tax either.

For example, assume you bought shares for $10,000 that are now worth $50,000. Selling them would create a $40,000 capital gain, resulting in a tax of $6,000 or more. By donating the shares directly, you avoid that tax and can take a charitable deduction for the full $50,000, subject to adjusted gross income (AGI) limits.

If the shares were held for one year or less, the deduction is limited to your original cost basis. The deduction for donating long-term appreciated assets is limited to 30% of your AGI, with a five-year carryover period for any excess amount.

Information and Decisions Required for the Donation

Before initiating a transfer, you must gather details from your own records. You will need your brokerage firm’s name, your account number, the mutual fund’s name, its ticker symbol, and the number of shares you plan to give.

You must also contact the charity to obtain information for the transfer. You will need the following:

• Their official legal name and physical address
• Their Taxpayer Identification Number (TIN)
• The name of the firm holding their brokerage account
• Their brokerage account number
• Their Depository Trust Company (DTC) number

You must also make two decisions. The first is selecting which shares to donate; it is most advantageous to choose shares held for over a year that have appreciated the most. This maximizes your tax deduction and eliminates the largest capital gains.

The second is confirming the organization is a qualified 501(c)(3) entity to ensure your contribution is tax-deductible. You can verify a charity’s status using the Tax Exempt Organization Search tool on the IRS website.

The Donation Transfer Process

To begin the transfer, contact your brokerage firm to inform them of your intent to donate securities. They will provide the necessary paperwork and guide you through their specific procedures.

You will need to complete a “Letter of Authorization” or a similar transfer form. This document serves as your official instruction to move the shares. Use the charity’s information you collected, including their legal name, TIN, and brokerage details, to complete the form.

Submit the signed Letter of Authorization to your brokerage firm as instructed. You can submit it by mail, fax, or through a secure online portal. Keep a copy of the completed form for your records.

You should also notify the charity that the transfer is underway. This helps them anticipate the shares and correctly identify your gift. The process is complete when you receive confirmation that the shares have left your account and the charity has received them.

Post-Donation and Tax Reporting Requirements

After the donation, you must obtain proper documentation for tax purposes. For any contribution of $250 or more, you need a written acknowledgment from the charity. This document must include the charity’s name, a description of the property, and a statement confirming if you received any goods or services in return.

When filing your tax return, you must complete IRS Form 8283, Noncash Charitable Contributions, if your total deduction for all noncash gifts exceeds $500 for the year. For mutual funds, you will complete Section A. This requires the charity’s name, a description of the property, the acquisition date, and the FMV on the donation date.

An appraisal is not necessary for publicly traded securities like mutual funds. Their value is determined by the closing price on the date of the transfer. You report this FMV on Form 8283 to substantiate your deduction.