Donating to charity is a beautiful thing. We help others and feel good for doing so. As a bonus, there are often tax benefits to charitable giving. But before you write that next check to your favorite charity, you might want to consider other ways to donate, some of which offer even bigger tax upsides.
One such alternative is to donate stocks. Investors can realize significant tax savings by donating investments in stocks, bonds, and other securities, so long as the donor has held the investment for at least one year. The potential tax savings of donating stock is considerable because you avoid the capital gains tax on your appreciated asset.
Let’s walk through an example.
Martha is in the highest federal tax bracket and lives in a state with a 6% income tax. She wants to donate $10,000 to the Boys & Girls Clubs of America. If Martha makes a cash donation, she could potentially save $4,300 in taxes. But, if she makes her gift by way of stock that has doubled in value, Martha could save approximately $5,790 in taxes, including $1,490 in future capital gains taxes.
*New top tax rate 37% + 6% for state. Capital gains rate is still 20% + 3.8% net investment income tax (NIIT).
There is another potential benefit of donating stocks that revolves around a more human element. Some folks own stocks that they have held for many years or acquired from a family member and thus have an emotional attachment to these investments. These investors sometimes form an emotional attachment to these investments that make it hard for them to sell those assets. But, such investors can donate those cherished stocks to a charity and keep their ties to those investments.
Here’s an example.
Martha’s great-grandfather gave her 500 shares of XYZ stock 50 years ago. While now valued at, say, $40 a share, the original cost basis of the stock was less than $1 per share. So, by donating these shares to her favorite nonprofit, Martha has made a $20,000 donation that is exempt from all capital gains taxes.
If, however, Martha wants to keep the stock in the family, she can buy another 500 shares at today’s price. Now the cost basis for taxes on future gains is $40 per share, which translates into major savings on capital gains taxes if Martha ever does sell.
Now, for folks interested in a long-term charitable-giving strategy, there are a few more points to consider. Say you are a business owner, corporate executive or another professional who plans to earn significantly more this year than in previous years. No doubt, you’d like to keep as much of your earnings as possible while still reducing your taxes. You’re not alone; no one loves paying Uncle Sam more than they must.
You may want to consider working with a financial advisor to set up a donor-advised fund. It’s a charitable-giving tool that lets you contribute, take an immediate tax break, but give away the money over time.
As an illustration, our friend Martha can give $20,000 of appreciated securities this year to a donor-advised fund, and then spread out charitable distributions over the next several years. But by setting up the fund this year, Martha potentially gets a $20,000 deduction on her 2018 federal and state income-tax returns.
Now, any discussion of charitable giving strategies and the tax implications would be incomplete without discussing donations from IRAs to satisfy required minimum distributions (RMDs).
Did you know that retirees age 70 ½ or older can give up to $100,000 to a qualified charity from an IRA tax-free and have it count as their RMD for the year? I thought you’d like this fact. What’s more, you can donate up to this amount even if your desired contribution is more than your RMD. The money you choose to give will then count as your RMD, but it won’t be included in your adjusted gross income (AGI).
This rule only applies to your IRA, not your 401(k), and you don’t get the tax benefit if you take your RMD in cash and then write a check – the money must be transferred directly from your IRA account to the charity.
Of course, if you use this direct-transfer method, remember that you can’t then double dip and take the charitable deduction allowance when you file your taxes. Still, this isn’t a bad deal, if you have a charitable mindset. Reducing your AGI means that you could avoid the Medicare high-income surcharge, which increases your Part B and Part D premiums if your AGI is more than $85,000 if single or $170,000 if married filing jointly. And this strategy could also make less of your Social Security benefits taxable.
For folks in the financial position to make charitable donations, long-term strategies like these could help you do good and feel good when tax season rolls around.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. The information contained in this piece is not considered investment advice or recommendation or an endorsement of any particular security. Further, the mention of any specific security is solely provided as an example for informational purposes only and should not be construed as a recommendation to buy or sell. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.