Fund-Share Donations May Cause Problems.

In the maze that is the U.S. Tax Code, you never know when you're going to come upon a new angle.

I say this having just experienced an "aha!" moment while flipping through the new 2001 edition of the Ernst & Young Tax Saver's Guide.

The topic was the benefits of making charitable contributions not with cash, but with securities you have owned for more than one year that have appreciated in value - for instance, mutual fund shares. That way, you can get an income-tax deduction for the full value of your contribution and escape any capital-gains tax on your profit from the investment.

Suppose you own a chunk of the Hypothetical Fund that cost you $10,000 years ago and is now worth $30,000. If you sold the position and gave the cash proceeds to the charity of your choice, you'd get a $30,000 charitable deduction. But you'd also owe $4,000 in gains taxes (at the top rate of 20 percent) on your $20,000 profit from the sale of the shares.

To drive away that dragon, just contribute the shares directly to charity. If the folks at Good Works Inc. don't want to keep the shares, they can sell them easily enough.

This may strike you as familiar stuff. I thought so too. But the Ernst & Young commentary goes on to say: "If you want the stock or securities you donated in your portfolio, then take the cash you were, originally planning to give to charity and repurchase the identical investment. Your investment now has a new, increased cost basis."

Holy Schedule A, Batman! Maybe other people knew about this all along, but I never thought of it before. Even if you don't want to disrupt your investment plan, it makes sense to give from your securities holdings, instead of your checking account, and use the cash you had earmarked for a contribution to buy new shares, immediately replacing the securities you contributed.