3 Limitations of Donating Mutual Funds to Charity

Charitable Donations of Mutual Funds

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What to do before donating mutual funds to charity. Getty Images

Have you thought about donating mutual funds to charity? Whether or not you have been generous enough to gift shares of your mutual fund to charity, then you will need to know more than just the positive impact of your donation. You'll want to know the tax implications.

It is not safe to assume that you will receive a full federal tax deduction on the amount of your charitable donations of mutual funds.

While many taxpayers will be able to deduct the gift to charity in full, others will be limited.

There are three common reasons why the tax deduction of charitable gifts of mutual funds may be limited.

Holding period and Charitable Donations of Mutual Funds

If you gift appreciated shares of your mutual fund to a qualifying charity, but you have held the shares for 12 months or less, then your tax deduction is limited to the amount you invested in the fund -- or the adjusted cost basis assuming the cost basis is less than the full market value of the gift.

If you hold the shares longer than 12 months, you may qualify to deduct the full market value of the gift (for federal income tax purposes). See below for other limitations that may apply.

For example:

  • You invested $1,500 in a mutual fund
  • Several months later the fund is worth $2,000
  • You gift the full value of $2,000 to your favorite charity 11 months after you purchase the fund
  • The tax deduction (assuming you meet other qualifications, see below) is limited to $1,500

AGI limitations and Charitable Donations of Mutual Funds

If you give shares of your mutual funds that are held long term (12 months and a day) to charity, the tax deduction is limited to 30% of your adjusted gross income (AGI).

If you gift cash or mutual funds that you have held short term (12 months or less), then the ceiling on the deduction is 50% of your AGI.

If you face AGI limitations of the charitable gifts of mutual funds, then you are allowed to carry the deduction forward for up to five years.

Itemized Deductions and Charitable Donations of Mutual Funds

If you give shares of your mutual funds to charity, but you do not itemize your deductions, then you are not allowed to deduct the donation for federal tax purposes.

Final Word on Charitable Donations of Mutual Funds

Tax laws change frequently and individuals are faced with differing income tax circumstances. It is advised that you contact your tax preparer to determine if the above limitations (and other limitations) apply in your situation.

Learn more about mutual fund taxation with these helpful links:

Investment Strategies to Reduce Income Taxes

Top Mistakes With Mutual Funds

Avoid the Double Taxation of Mutual Funds

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as tax advice or investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.