Tax season is now in the rearview mirror (whew!), but it’s still early in
the year and now may be the perfect time to “spruce-up” your charitable giving
strategy.
You can give to charity in many ways (cash, property, securities, etc.),
but some strategies may be better than others. Giving cash is straight forward
and easy to do, but there are other ways to make your charitable giving more
effective.
Appreciated Securities in Lieu of Cash
If you’ve held a stock for more than one year and donate it to a charity,
you get a tax deduction for the fair market value of the stock and avoid paying
capital gains tax. The charity sells the stock tax free and uses the proceeds.
A win-win!
For example, let’s say you have $10,000 of
ABC stock with a low cost basis that you’ve held for several years. You also
have $10,000 of cash. If you gift the cash and sell the stock you have to pay
tax on the sale, but if you gift the stock you completely avoid paying capital
gains tax on the appreciation. In fact, if you like the stock you could use the
cash to “re-buy” the stock with a cost basis equal to the current fair market
value. Implementing this strategy is easy. Give us the charitable
organization’s contact name and number and we’ll handle the rest.
Donor-Advised Funds
Another way to make your charitable giving
more effective is to use a donor-advised fund. Donor-advised funds are
typically offered by financial services firms and community foundations. A donor-advised
fund is an account in your name to which you can transfer cash or securities
that you want to earmark for charitable giving. You get an immediate tax
deduction in the year you make the transfer. You can then request distributions
to your specific charities at your own pace. It’s very easy to transfer money
from a donor-advised fund to most 501(c)(3) charities.
These funds are useful in several ways.
Say your regular gifting budget is $10,000/year, but you have a high income
year in which a $50,000 tax deduction would be beneficial. A donor-advised fund
is the perfect solution as you can transfer $50,000 into the account to get a
current year tax deduction and then make distributions to the charity for the
next 5 years or more. This also works well when you’d like the tax deduction,
but haven’t decided on the charity.
Typically the minimum balance to open a
donor-advice fund is $5,000.
Recommendations to the charity can be as low as $50-$100. These low
minimums make donor-advised funds beneficial when you want to make smaller
sized gifts multiple times throughout the year. Giving to your place of worship
is a perfect example. It wouldn’t be administratively feasible to give five
shares of ABC stock 50 times a year, but you could transfer $10,000 worth of
ABC stock into your donor advised fund and make your weekly gift
recommendations from this fund.
Using an IRA
Currently this strategy has not been
reinstated for 2014 but, as they have done for several years, the expectation
is that it will be revived. If reinstated this strategy allows IRA owners over
the age of 70 ½ to transfer up to $100,000 directly to a qualified charity and
avoid all taxes on the transfer. This is called a Qualified Charitable
Distribution (QCD). Unlike a QCD, a typical charitable donation reduces federal
tax, but does not reduce your Adjusted Gross Income (AGI). Many taxes and
even Medicare premiums are based on your AGI, so using a QCD to keep it lower
could give you more bang for your charitable buck. And the distribution counts
toward your required minimum distribution.
If you’d like to learn more as to how
these strategies and others can help “spruce-up” your charitable gifting please
give us a call.