Note – any strategies in this blog can only be applied to qualified charitable organizations as defined by the IRC 501(c)3.
We’re quickly approaching the season of giving. For many of our clients this means making a gift to their favorite charitable organization(s). Before sending the charity a check or making a gift online, one should consider other alternatives to making direct cash gifts that may provide additional tax benefits while still supporting the organization.
The simplest form of a gift is cash (check, debit card, credit card, etc.). The benefit is the donor gets a tax deduction for the amount of the gift, assuming they are itemizing their deductions. However, the Tax Cut and Jobs Act, significantly reduced the number of taxpayers that itemize their deductions by increasing the amount of the standard deduction. If you are one of those taxpayers that now takes the standard deduction, then unfortunately you would not get a tax benefit to making a gift this way unless your charitable contributions were significant enough to justify itemizing.
Whether you itemize your deductions or not, you can find a tax benefit by gifting appreciated stock/mutual funds/ETFs. The tax benefit you’d realize is you avoid paying capital gains on any of the appreciation in the investment to the extent you’ve held the investment for longer than 1-year. If you also happen to itemize your deductions, then you can also take a deduction for the fair market value of the gift. Here’s what you need to know when gifting stock:
- Many charities do not advertise they accept stock gifts, and if they do, very few will provide transfer instructions online. Simply reach out to the organization and they’ll be happy to help you.
- Make sure you specify which share lots you want to gift. Not only do you want to gift assets held more than one year, but you want to gift the assets which have the most embedded capital appreciation (I.e. – the lowest cost basis).
- Follow-up with the charity to let them know a gift is coming. This way they can identify who to credit for the shares that transfer into their account, unless you want the gift to be anonymous.
- Clients should avoid donating securities that have depreciated in value. Either donate cash or sell the security, realize the tax loss, then donate the cash proceeds.
Maximizing the Tax Benefits of Gifting
Depending on a taxpayer’s specific income and tax situation, they may want to consider bunching their charitable giving into one tax year to maximize the amount of deduction they receive. Note – this does not mean making one large gift to a charity or charities. A donor can open a Donor Advised Fund and make several years’ worth of gifts for purposes of claiming a higher deduction this tax year. Donor Advised Funds are not required to distribute the funds until some unspecified date in the future.
A Donor Advised Fund also allows a donor to make a gift of appreciated stock. Not only will you get a deduction for the fair market value of the gift (assuming the asset has been held longer than a year), but you’ll avoid paying tax on the capital appreciation on the initial contribution to the Donor Advised Fund upon the initial funding of the account.
Gifting When You’re Older than 70 ½
The Consolidated Appropriations Act of 2016 made the “Qualified Charitable Distribution” (QCD) strategy permanent. A QCD allows individuals over age 70.5 to gift from their IRA, and the gift counts toward reducing or eliminating their Required Minimum Distribution (RMD). There are a few important factors to consider:
- An individual must be older than 70.5 to consider this strategy. It does not count if one is simply going to be older than 70.5 in the year in which the gift is made.
- The gift needs to go to the end charity directly; one cannot gift to a DAF, nor can the donor receive any benefits back.
- In order to satisfy an RMD, a QCD needs to be the first dollars out of an IRA in a given year.
- The maximum amount to be gifted from an IRA is $100,000 per person. QCDs can be for more than one’s RMD.
- Some custodians offer IRA checkbooks. Satisfying your RMD by making a QCD this way may be convenient; however, one needs to be aware that the charity needs to cash the check by the end of the year in order for the QCD to count toward that year's RMD. If you write a check in December that is not cashed by 12/31, it will not count toward the current year’s QCD
Navigating your gifting goals can be tricky and needs to be tailored to your precise situation. Many strategies have complexities and nuances that may not be obvious, further in many instances once an action has been taken it cannot be undone. We recommend consulting with a tax advisor with any gifting strategies you are considering implementing.