The Limitations of Charitable Giving of Mutual Funds

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If you've thought about donating mutual funds to a charity, you'll be pleased to know that the Internal Revenue Service (IRS) appreciates your generosity. The agency may reward you with a tax deduction when it comes time to file your tax return. But there are rules for each kind of donation.

You might not receive a full federal tax deduction for the value of your mutual funds. Some of these gifts to charities are deductible in full, while others are limited. There are a few common reasons why the tax deduction of charitable gifts of mutual funds might be less than 100%.

Key Takeaways

  • Tax deductions for your gift can be limited by the amount of time you owned it.
  • Your adjusted gross income (AGI) also determines the amount you can deduct from your taxes.
  • You'll have to itemize your deductions instead of taking the standard deduction to claim a tax break for your gift.
  • You can only take a tax deduction if you give your fund to a charity that the IRS lists as qualified.

Holding Periods Affect Your Tax Deduction

Your tax deduction will be limited to the amount you invested in the fund if you give away appreciated shares to a qualifying charity and you held the shares for 12 months or less. The only exception to this rule is if the cost basis is less than the full market value of the gift. Your tax deduction is limited to the adjusted cost basis in this case. That is the cost basis after things such as capital distributions.

Here's what happens if you donate funds that you held for less than one year and your mutual fund shares gain value. Suppose you were to invest $1,500. The fund is worth $2,000 after 11 months. You gift the full value of $2,000 to your favorite charity 11 months after buying the fund. Your tax deduction is limited to $1,500, the initial amount you invested, as long as you meet some other rules such as income requirements.

You might be able to deduct the full market value of the gift for federal income tax purposes if you hold the shares for longer than 12 months. But it may take multiple years to claim the full deduction, depending on your income level and the size of your gift.

Adjusted Gross Income (AGI) Limitations

You can often deduct the full market value of your funds if you donate shares that you held long term: at least 12 months and one day. But there are limits here, too. Your tax deduction is capped at 30% of your adjusted gross income if you use the fair market value to determine it. The ceiling goes up to 50% of your AGI if you gift mutual funds that you held short term for 12 months or less.

AGI limits for charitable giving deductions were lifted for cash contributions in tax year 2020.

Here's a bit of good news: You're allowed to carry forward the unused portion of your deduction for up to five years if you face AGI limits. You can deduct next year what you couldn't deduct this year.

That same AGI limit will apply next year (30% for funds you held long term and 50% for funds you held short term). The rest of the tax-deductible amount will roll over to the next year. The rollovers will keep on until you've deducted the full amount of your gift, or until five years have passed since the original donation.

Itemized Deductions and Donations of Mutual Funds

You must itemize your deductions on Schedule A to claim a deduction for your gift. Submit the schedule with your Form 1040 tax return if you give shares of your funds to charity and you want to claim a tax deduction. This means you can't claim the standard deduction. That isn't a good choice for all taxpayers. You might find that the amount of your standard deduction based on your filing status is more than the total of all your itemized deductions. You'd end up paying the IRS more than you'd have to in this case if you were to itemize.

Single filers can claim a standard deduction of $12,550 for tax year 2021. Married couples can claim $25,100, and heads of household can claim $18,800. These deductions increase a little in 2022. Single filers can claim a standard deduction of $12,950 in 2022, married couples can claim $25,900, and heads of household can claim $19,400.

A temporary 2020 and 2021 tax rule lets taxpayers who claim the standard deduction deduct up to $300 for charitable donations without itemizing, but this response to COVID applies only to cash donations, not to mutual funds.

You Must Give to a Qualifying Charity 

You can't simply give your mutual funds to your neighbor and expect to claim a tax deduction. Only certain organizations are approved by the IRS to receive tax-deductible charitable donations. The IRS provides a search tool for qualifying charities on its website.

Most well-known organizations, such as Goodwill and United Way, are eligible. Many religious institutions, nonprofit schools, health care facilities, and first-responder organizations are as well. Check the IRS search tool to make sure the charity you have in mind makes the list.

Tax Law Changes Can Affect Mutual Funds

Tax laws change often. You might also face changed income tax circumstances from year to year. The Tax Cut and Jobs Act eliminated some types of itemized deductions while increasing the standard deduction. Contact your tax professional to find out which limits and benefits apply to you.

Article Sources

  1. Internal Revenue Service. "Publication 526: Charitable Contributions," Pages 11-12. Accessed Dec. 11, 2021.

  2. Internal Revenue Service. "Publication 526: Charitable Contributions," Pages 14-17. Accessed Dec. 11, 2021.

  3. Internal Revenue Service. "Charitable Contribution Deductions." Accessed Dec. 11, 2021.

  4. Internal Revenue Service. "Publication 526: Charitable Contributions," Page 19. Accessed Dec. 11, 2021.

  5. Internal Revenue Service. "Publication 5307: Tax Reform Basics for Individuals and Families," Pages 4-7. Accessed Dec. 11, 2021.

  6. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2021." Accessed Dec. 11, 2021.

  7. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2022." Accessed Dec. 11, 2021.

  8. Internal Revenue Service. "Special $300 Tax Deduction Helps Most People Give to Charity This Year—Even if They Don’t Itemize." Accessed Dec. 11, 2021.