I went shopping last weekend and was amazed to see Christmas decorations already on display. There were lights, reindeer, wreaths, and jolly Santas. I could almost hear the Salvation Army bell ringing. The holiday season is such a busy time of year between family, friends, shopping, and eating (Oh, the eating!). It is also the time of year many people and businesses make charitable contributions.
Because the holidays are so busy, have you thought about doing your research and making these gifts now? Your favorite charity supports its cause all year. By gifting early, you allow non-profits to reduce their budget risk and spend time serving their causes.
Gifting early also allows you to thoughtfully – and tax-efficiently – explore other charities. Strategies such as taking qualified charitable distributions to satisfy all or part of your IRA’s required minimum distribution (“RMD”), donating appreciated securities, and employing donor-advised funds are more tax-efficient. That leaves more money for you and your favorite causes!
Individuals over age 70 ½ who are taking required minimum distributions from their traditional IRAs and 401(k)s can donate all or a portion of their distributions – up to $100,000 – directly to the qualified charities of their choice. Such a donation satisfies the required minimum distribution requirements.
By directing your IRA administrator to send a check directly to the charity, your adjusted gross income does not increase. If, however, you have the RMD deposited into your account, write a check to the charity, and then deduct the contribution from your taxes, your adjusted gross income increases by the amount of the RMD distribution made to you.
Direct distributions to non-profits are best for the charitably inclined who are required to take RMDs but don’t need all the money. It is particularly attractive for those in a high tax bracket and those right on the cusp of bumping into a higher bracket or losing a deduction.
To implement a direct distribution, direct your administrator to send the money directly to your charity.
Donor Appreciated Securities
Consider gifting appreciated securities from a taxable account instead of cash. This strategy yields some key benefits.
You will not owe capital gains tax on gifted securities, no matter your cost basis. The non-profit beneficiary of your gift will sell the securities but, as a tax-exempt entity, will not owe the tax either.
The avoidance of capital gains allows you to tax-efficiently reduce an investment with a low tax basis. This is particularly useful for large stock positions. By donating all or a portion of a large position, you reduce risk. The risk reduction is achieved through greater diversification because, by reducing a large position, you increase the percentage weighting of every other position in your portfolio (holding all else equal).
And donations of securities are tax deductible. You can deduct the full market value of the shares at the time of the donation (so long as you have owned them for one year) up to 30% of your adjusted gross income (AGI). If the amount of your donation exceeds 30% of your AGI, the amount in excess can be carried forward and deducted for up to five years in the future.
To implement, ask your favorite charity how you can donate securities to them.
For those looking to super charge giving, consider a donor-advised fund (“DAF”). A DAF is a philanthropic vehicle that enables the donor to receive an immediate tax benefit while making grants from the fund over time.
In such a structure, the donor contributes cash or investment assets to the fund, which is a charity in the eyes of the IRS. The donor can distribute charitable contributions over time and retains control over the assets while in the fund. You can also make additional contributions to the donor-advised fund in subsequent years.
The contribution is irrevocable, which enables you to obtain an immediate tax deduction on the amount contributed even if the funds are not disbursed in the year contributed to the donor-advised fund. If you contribute cash, you can deduct up to 50% of your AGI. If you contribute securities, the deduction is limited is 30% of AGI.
As with donating appreciated securities directly to charity, it is wise to contribute highly appreciated assets into the donor-advised fund. Doing so eliminates the embedded capital gain from your portfolio.
Because contributions can be immediately deducted, donor-advised funds are particularly effective if you experience a one time, large taxable event. They are also favored by successful executives with a large position in their employer’s stock.
There are a few steps to creating a donor-advised fund. You must name your donor-advised fund account, advisors, and any successors or charitable beneficiaries. Then you contribute funds into the account, where they are invested and grow tax free. At any time afterward, you can recommend grants from your DAF to qualified charities.
Price Wealth Management offers a full suite of services, including assisting you with charitable giving. Contact us today to learn more how we can help you help others.
Please consult your tax and estate planning professionals before implementing any of these strategies.