My F&M

The Hierarchy of Charitable Gifting

As we enter the new year, we find a change in the contents of our mailboxes.  December charitable solicitations are replaced with Christmas bills and tax forms. As you begin to gather tax documents and look back at 2015, hopefully you find some time to plan for 2016.  Specifically, now is a good time to become more intentional about your charitable gifting.  Rather than respond to year-end mailers, what about taking a deep breath to think about what charities you want to give to, how much, and, maybe most importantly, how to make the gift?

There are many ways to give to charity.  The easiest, most straightforward way to give is cash.  Cash is great, because it’s simple and perfect for smaller gifts.  Also, there is a tactile benefit from giving cash that makes us feel good.  Make sure to get a receipt from the charity, and keep this with your tax records.

You can also gift appreciated securities such as stocks, mutual funds, bonds, and exchange-traded funds (ETFs) directly from your brokerage account.  If you’ve held a security for more than one year and donate it to a charity, you get a tax deduction for the fair market value of the security and avoid paying capital gains tax.  The charity sells the security tax-free and uses the proceeds.  A win/win!

For folks older than 70½, the Protecting Americans from Tax Hikes (PATH) Act, signed into law late in 2015, has permanently extended the Qualified Charitable Deduction (QCD) from an IRA.  This technique allows those over age 70½ to transfer up to $100,000 from an IRA directly to a qualified charity and avoid all taxes on the transfer.  The benefit of this strategy is that neither the income nor the deduction is on your tax return.  Therefore, the income is not included in the calculation for Adjusted Gross Income (AGI).  Higher AGI amounts can limit tax deductions/credits and can even cause higher Medicare premiums.

So, which of these three options is best?  Most of the time, gifting appreciated securities held for more than a year is better than gifting cash or using a QCD.  The reason is twofold:

1. You receive a charitable deduction for the fair market value of the securities on the date of contribution.

2. You avoid any capital gains tax that you would have owed if you sold the securities.

These two benefits combine to give you more bang for your “charitable buck” and make appreciated securities a superior gift over cash or a QCD, but there are some exceptions.  Namely, a QCD can make the most sense if you are over age 70½ and do not itemize your deductions on your tax return.  In this scenario, the QCD will likely be a better option.

One challenge of using appreciated securities is the extra step of coordinating the gift between your brokerage firm and your charity.  Your Foster & Motley team can reduce this burden down to a simple signature.  Additionally, some clients use a Donor Advised Fund to serve as their “charitable piggy bank” for the year.  Donor Advised Funds can be particularly helpful if you make a lot of smaller gifts to several different charities.

If you’d like to discuss your specific situation, please contact your Foster & Motley advisor.