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Doing Well by Doing Good: Gifting Strategies

Doing Well by Doing Good: Gifting Strategies

When reviewing your annual income tax planning or developing your estate plan, you can do well by doing good.  Making annual charitable contributions or leaving money to charity rewards you in many ways.  It gives you a sense of personal satisfaction and it can save you money on your tax bills.

Recent Tax Law Changes

Annual gifts to charitable organizations may still qualify for a tax deduction, but the tax law changes at the end of 2017 raised the standard deduction limit for tax filing and made itemizing deductions less practical for many filers.  For tax year 2018, the standard deduction was raised to $24,000 for married filing jointly and $12,000 for single filers.  Previously, it was estimated that 1 in 3 tax filers itemized deductions.  However, with the recent changes, it is estimated that itemization may make sense for less than 10% of filers. 

One recommended strategy is to combine two years of charitable deductions into one tax year.  By making charitable contributions in January and December of the same year (think of the December contribution as paying one month in advance), taxpayers may be able to claim itemized deductions in the year of their charitable gifting and take a standard deduction in the alternate year.  This merely changes the timing of the annual gifts.

Gifting Low Basis Stock

A common and efficient way to achieve charitable goals is to gift shares of appreciated securities from a taxable account.  There are several ways to do this and many nonprofit foundations can easily facilitate these generous donations. Instead of gifting cash, contributing stocks, bonds or mutual funds, purchased more than a year ago that have grown in value and would create capital gains if sold, is an attractive tax savings opportunity.  When these securities are gifted to a 501(c)(3) qualified charity, they are transferred in kind to the charitable organization instead of being sold.  The gift is made without generating tax consequences to the donor and the charitable organization still receives the same intended value.  Not only do you save potential capital gains taxes, but you may also get a tax deduction for the full market value of the securities on the day of transfer (subject to certain limits).

Tap Your IRA

Another strategy is only available for taxpayers over age 70½ and involves making a qualified charitable distribution (QCD) directly from one’s IRA.  A QCD counts towards the account holder’s required minimum distribution (RMD) but is not included in taxable income on the tax return.  This strategy results in the taxpayer getting the benefit of the charitable contribution (through lower income) irrespective of whether they itemize deductions.

Donor-Advised Funds

Contributors to donor-advised funds (DAFs) receive a tax deduction in the year of contribution, while retaining control over the timing of the distribution to the charity of their choice.  Essentially this strategy is to again make single or multiple-year charitable gifts in one tax year, but this time via a donor-advised fund.  For example, Jack and Diane Smith gift $25,000 of appreciated stock to a donor-advised fund in 2018 and deduct this charitable contribution on their 2018 tax return.  Then they can make distributions from their DAF to support charitable organizations over the next several years.

There are also a variety of other estate planning strategies that could be used to achieve your gifting goals, such as making a bequest in your will or naming an organization as a beneficiary of your IRA or employer retirement plan.  Schedule a conversation with a financial advisor and/or tax professional to discuss legal, tax or financial planning advice and get answers to your specific gifting questions.

All information herein has been prepared solely for informational purposes only and opinions are subject to change. Past performance is not indicative of future results and all investments involve the risk of loss of principle. For information on how these general principles apply to your situation, consult an investment professional.

Article Topic Expert: Robert Cummisford

Rob is a Senior Wealth and Portfolio Manager with SVA Plumb Wealth Management, LLC. He focuses on helping clients structure portfolios to meet their financial goals, conducts investment research and serves on the firm’s investment committee.

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