STRATEGIZING YOUR CHARITABLE GIVING
SUMMARY
With the holiday season ramping up, thoughts of charity and goodwill abound. If you’re feeling philanthropic, using one of these charitable giving strategies could bring comfort and joy to the recipient as well as your tax bill.
‘TIS THE SEASON
As we near Thanksgiving and launch into the hubbub of year-end holidays, our thoughts turn towards showing gratitude for our prosperity and helping our fellow man. In many situations, such as when contributing to a kettle outside the grocery store or to a fundraiser at checkout, gifting cash is appropriate and easy. In other cases, strategy and a little extra planning can maximize your gift both for you and a qualified charity. A qualified charitable organization is one that is granted tax-exempt status and is eligible to receive tax-deductible charitable contributions (the IRS provides a searchable tax-exempt organization database). Below are seven strategies you can consider that may minimize your tax burden and maximize your gift.
GIFTING APPRECIATED STOCK
Let’s say you’ve been holding onto a stock for some time, and it has appreciated greatly. If you were to sell it, you could trigger significant capital gains. However, if you’re planning to gift to a qualified charity or institution anyway, consider gifting some or all of the appreciated stock. As long as the stock was held for more than a year, neither you nor the charity have to pay taxes on the gains. So, if you have a stock you bought at $10 a share twenty years ago that is now trading at $100 a share, you can gift the stock to your preferred charity and no one pays any taxes on the $90 per share gain.
The full fair market value of the donated stock is deductible if you itemize your deductions, up to 30% of your adjusted gross income, as long as you held the stock for a year or more. If the stock was not held for a year or more, your tax deduction is limited to the cost basis of the stock (so only $10 per share in the earlier example).
Note that you don’t want to directly gift shares of stock if you own them at a loss. If you choose not to use any other alternatives for gifting, it is better to sell the stock to take the capital loss and then gift the cash. This way you can use the loss to offset taxable gains and lower your tax obligation.
THE BUNCHING STRATEGY
Maybe you’re in the habit of giving regular donations, but each year they aren’t enough to justify itemizing your deductions. The standard deduction for 2021 is $12,550 for individuals and $25,100 for those who are married filing jointly. If the sum total of your intended donations over a period of years exceeds this and you have the ability to do so, consider bunching two or more years of donations together into a single year to exceed the standard deduction and take advantage of tax savings. For example, if as a married couple you want to donate $14,000 each year for the next two years, you would take the standard deduction for each of those years. But by donating both years’ worth of donations ($28,000), you can take a larger deduction in that year. Then, in the following year, you would use the standard deduction again. This could potentially reduce your overall tax burden. Fidelity has a helpful calculator to help you decide if this is a possible strategy for you, but be sure to work with your tax advisor to determine best practices.
QUALIFIED CHARITABLE DISTRIBUTIONS
Let’s say you’re required to take minimum distributions from your IRA in the same year you wish to gift money to an organization. If you were to withdraw the donation value from the account in order to gift it, that amount would be taxed to you as ordinary income. If you’re age 70½ or older, however, you can make a qualified charitable distribution, or QCD.
QCDs allow you to transfer your gift from your traditional (including inherited) IRA, inactive SEP IRA, or inactive SIMPLE IRA directly to the receiving organization without triggering a taxable event. Neither you nor the charity have to pay taxes on that amount, and you still get to gift the amount you wish, up to the maximum annual QCD amount of $100,000. This means you get to enjoy above-the-line tax advantages without having to rely on itemizing your deductions. A QCD can also satisfy all or part of the required minimum distribution (RMD) in the year in which it is made.
Before using this strategy, make sure that your intended recipient is a qualifying organization. It must be a 501(c)(3) organization, such as religious institutions and many nonprofits, which are eligible to receive tax-deductible contributions. This excludes private foundations, charities supporting other exempt organizations, and donor-advised funds. You will have to receive a letter from the organization stating that you did not receive anything in exchange. Also, keep in mind you cannot claim a tax deduction for the charitable distribution, and note that the transfer must be made directly to the institution.
DONOR-ADVISED FUNDS
Donor-advised funds are charitable accounts you can invest. When you contribute, you can take an immediate tax deduction. The growth inside the account is tax-free. From the ensuing value, you can issue grants to qualified public charities or institutions. You can contribute cash, stock, cryptocurrencies, real estate, and more, and you will only have to keep records of your contributions to the fund, not your donations to organizations.
One of the flexibilities of donor-advised funds is that they permit donations to multiple different charities. And your giving doesn’t have to end with you. Some donor-advised fund sponsors allow you to specify the beneficiaries of your fund, which can include charities you wish to support or a successor who can continue your legacy of giving.
GIFTING VEHICLES
Some charities are open to accepting more than cash and equities. Donating vehicles you don’t use or need anymore, such as cars, RVs, or even boats, can potentially provide a tax write-off. If the vehicle is used by the charity, such as to deliver meals, or it’s worth less than $500, you can deduct the full fair market value, which you can determine using a sales guide. However, if the charity sells the vehicle, you can only deduct the amount they receive from the sale. Note that these deductions can only be taken if you itemize.
Donating vehicles requires doing some due diligence on your part. Ensure that the institution to which you’re donating is a qualified, 501(c)(3) organization, such as nonprofit hospitals, universities, public charities, and churches. Also note how much of your donation is going directly to the charity, as some organizations will use a third-party intermediary. Some intermediaries may only give a small part of the vehicle’s value to the charity. Follow through with the transfer of the title to make sure that everything is done correctly, and be sure to receive a record from the charity acknowledging the donation and the amount it received upon sale.
CHARITABLE REMAINDER TRUSTS
For more complicated cases, gifting through a trust may be in order. Charitable remainder trusts can be appropriate if you want to leave a large part—or all—of your estate to a charity. As the name implies, you live off of the assets within the trust. When you die, the remaining assets inside the trust are then bequeathed to the charity named as the trust beneficiary. That way you are not losing the utility of the assets for your own needs, and the property inside the trust transfers to the charity without incurring federal taxes.
When you open and fund a charitable remainder trust, you receive a fixed percentage of the trust’s value as income each year. How this is determined depends on whether you have opened a charitable remainder annuity trust (CRAT) or unitrust (CRUT). The income off of a CRAT is a percentage of the trust’s initial value, while the income off of a CRUT is a percentage based on the trust’s value, determined annually.
Be mindful that charitable remainder trusts work best with larger amounts of contributions so that you can both live off the money if necessary and still leave a significant portion to the beneficiary charities. The factors involved in deciding whether or not a charitable remainder trust is appropriate for you are too numerous to evaluate in this article, but if you’re interested, reach out to an estate planning attorney.
CHARITABLE LEAD TRUSTS
Charitable lead trusts switch around the idea of charitable remainder trusts. The charity in this case is the receiver of income off the trust during a specified term, while family or other named beneficiaries are bequeathed the underlying assets at the end of that term. Like charitable remainder trusts described above, charitable lead annuity trusts (CLATs) issue income based on a fixed percentage of the trust’s initial value, while charitable lead unitrusts (CLUTs) issue income based on a fixed percentage of the trust’s annual value.
Charitable lead trusts allow you to see the benefits of your donations while you’re still alive to enjoy them and can give you income tax deductions or estate or gift tax savings. At the end of the trust term, the assets within the trust are distributed to family or other non-charity beneficiaries.
As with charitable remainder trusts, charitable lead trusts are complex and diving deeper into them is beyond the scope of this blog. They are usually used in estate planning for those with significant assets, so confer with an estate planning attorney if you think they might be appropriate for you.
A NOBLE ENDEAVOR
This list of gifting strategies is not exhaustive, and depending on your situation, a variety of options might work best for you. No method of giving is more virtuous than any other, but one strategy might be better for your particular circumstance. And, of course, all of these options can be used at any time in the year, not just in the final months.
Whether you gift cash, stocks, vehicles, or your estate, philanthropy is a truly noble endeavor. If you’re so inclined, reach out to us at Day Hagan to review your options and come up with a giving plan.
Best,
Natalie Brown, CFP®
Director of Client Services
Day Hagan Private Wealth
—Written 11.18.2021.
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