Charitable Giving Strategies & the New Tax Law
When you donated cash to a charity in the past, you might have been able to deduct that donation from your taxes. With the new tax law’s higher standard deduction and limitations on itemized deductions, many are finding it harder to get a tax benefit from their charitable donations. Here are some options for those looking for ways to reduce their taxable income while benefiting their favorite charity.
Cash Donations: Most people choose to donate cash to their favorite charity and donations to charities registered with the IRS are usually tax deductible for those who itemize their deductions. The reason this method is so popular is because it is the easiest way to donate, but this option might not be the most economical way for you to support your favorite charity.
Some may stack their donations. Meaning they’ll contribute more in one year to various charities to be able to itemize their deductions, then they give little the following year and take the standard deduction. In this way, you’d essentially be alternating years for your larger donations.
Retirement Accounts: If you are taking a Required Minimum Distribution (RMD) from your IRA, you can have a check sent directly to your charity of choice as a Qualified Charitable Distribution (QCD). The IRS allows for you to make a direct payment from your IRA as a portion of your RMD and avoid having the RMD payment included as income for the year.
Donating Appreciated Assets: In addition to cash contributions, you could consider donating appreciated assets- including securities if you have owned them for at least a year. The donated asset is assessed at full fair market value. You can take a tax deduction and avoid payment of capital gains taxes on the security.
For example, let’s assume that you own a share of stock that you purchased for $40 and it is currently worth $100. If you sold that stock for income purposes or to rebalance your portfolio, you would have to pay capital gains tax on the $60 of growth you received. If you held the stock for over a year, then you could have to pay up to 20% of your total gain in capital gains taxes (other taxes on the sale may apply).
If you wanted to gift $1,000 to your favorite charity, you could give cash, or, in the above example, save $120 in capital gains taxes by gifting that charity 10 shares of stock. A donation of stock could be tax deductible and might help you reduce taxes from capital gains.
Donor-Advised Funds: Another way to give is through a donor-advised fund. Here’s how it works: You irrevocably contribute cash, stocks or certain other assets, which are in turn invested in one or more investment options. The investment company manages the investment options to potentially increase the value of the initial contribution and to produce an income stream for you. You can recommend eligible charities for grants from the fund over a period of time while taking an immediate tax deduction.
Estate Gifts: For someone who doesn’t have heirs and/or who is charitably inclined, gifting to a charity through your estate is another method by which you can donate.
You can name your favorite charity as a beneficiary in your Will, Trust, for your investment account(s), bank account(s), retirement plan(s), and/or life insurance. One great part of naming a charity as a beneficiary is that you retain the asset for your personal use and you’re easily able to change any of your beneficiaries in the future.
If you’re giving to people and to a charity as part of your estate plan, you may want to consider leaving the most highly taxed investments (such as traditional IRAs, 401ks, TSPs, annuities, etc) to a charity and the more tax-friendly investments (such as Roth IRAs, checking, savings, money markets, and individual investment accounts) to individual heirs. This could maximize the value of the estate to your family and friends as they could see less of your estate lost due to taxes. Because charities don’t pay income tax, this arrangement should have little impact on your charity of choice. Of course, you can name a combination of people and organizations as beneficiaries on any of your investments.
A CPA and attorney can provide specific guidance regarding the pros and cons of naming a charity as your beneficiary.
Making a donation to a qualified organization provides some very attractive benefits. There are other ways to leverage your assets to benefit others while helping you pursue your financial objectives. Discuss your options with your financial advisor, your estate planning attorney, and tax professional.
Whatever gifting strategy you choose, planned giving can be very rewarding. It’s wonderful to see your gift at work while receiving tax benefits on your donation.
The opinions voiced in this material are for informational purposes only and are not intended to provide specific advice to any individual. Consult your legal, tax, and/or financial advisor to determine what is appropriate for your situation.
Events & Sponsorships
April 24th 6-8PM
We’re excited to sponsor the Women’s Law Center of Maryland‘s Wine & Chocolate event for the fifth year. What’s not to like: wine, chocolate, and supporting a great organization. Get tickets and learn more about the event here.
Away from the Office
Our office and the markets will be closed on Friday, April 19th, for Good Friday.
We are always accepting donations for the local animal shelters– toys, tennis balls, collars, leashes, food, cat litter, cardboard trays, office supplies, cleaning supplies, towels, mats, washcloths, etc. We will accept donations Monday-Friday between 9am & 5pm.
Elise experienced ice skating for the first time this winter. While she didn’t don skates in this picture (she did wear them her first time out), she had a blast sliding around the ice. With a skating rink right down the street, I have a feeling that we’ll be hitting the ice quite a bit more next winter.
Another first for Elise this winter was bowling. She’s now tried traditional bowling and, the Baltimore favorite, duckpin bowling. We learned that she really enjoys both but isn’t a big fan of waiting for her next turn. You and me both, kid.
I hope you enjoyed this month’s newsletter.
Woody Derricks, CFP®, ADPA®
CA Insurance License #0C40217