Did you miss last week’s "Giving Tuesday?" If you did, it’s not too late. But be sure you have a well-thought-out strategy. The right one can provide more to your favorite charity while keeping more in your pocket! It’s a win-win for everyone – except the taxman!
When donating, it’s important to develop a strategy that meshes with your financial goals and tax situation. If you file a Schedule A with your tax return, gifts you donate to charitable organizations are tax deductible. This means your taxable income for the year is reduced by the value of the gift.
However, not all types of donations are treated equally. Your total tax benefit is based on the type of gift you donate; the manner in which you contribute; and the type of organization that receives your gift. To ensure your charitable gift is tax-deductible, check IRS publication 526.
Here are some ways to donate to your favorite charitable organizations that you may not have considered.
One extremely useful, and often under-utilized, vehicle for making charitable contributions is a donor-advised fund. A donor-advised fund is an investment account similar to a brokerage investment account. The difference is that a donor-advised fund’s sole purpose is to support the charitable organizations you care about. These are often set up through a custodian such as Charles Schwab or Fidelity.
You can contribute cash, securities, or other approved assets to a donor-advised fund and your contribution can grow tax free before being paid out to charitable organizations. In the year you contribute to a donor advised fund, you receive your charitable tax deduction. You can recommend grants to any IRS-qualified public charity immediately or in the future, i.e. on your own timetable. This feature is beneficial if you aren’t initially sure which charity or charities you would like to support. This also allows you to spread out your donations if preferred, instead of making a single gift. Extra benefit: your investments in the donor advised fund could potentially increase – meaning more money to benefit a charity!
Gifting Appreciated Investments
Another gifting strategy that’s easy to overlook is gifting appreciated stock from taxable accounts. Consider this scenario: You originally purchased $5,000 of stock in a taxable brokerage account. Today your $5,000 investment is valued at $55,000. It has accrued $50,000 in long-term capital gains (assuming you held for more than one year). Long-term capital gains are taxed at 15 percent for single filers with taxable income up to $418,400 ($470,700 for married filing jointly), or 20 percent for taxable income above that threshold. For this example, let’s say you are in the 28 percent federal tax bracket and your long-term capital gains tax rate is 15 percent.
If you wish to donate this appreciated stock to charity so you can receive a tax deduction, you have two options:
Sell the stock and donate the net proceeds to charity. If you sell the stock while it’s still in your taxable account, you will receive $55,000 gross proceeds and owe $7,500 – the 15 percent long-term gains tax on $50,000 of appreciated value. Once you’ve met your tax obligation, your charitable donation is reduced to $47,500. The value of your charitable tax deduction is your donation amount ($47,500) multiplied by your tax bracket (28 percent). In this example, that equals $13,300.
Donate the stock to a donor-advised fund account or directly to an IRS-approved charity. Now, let’s look at option 2. It features some nice benefits. If you contribute your stock to a donor-advised fund or donate it directly to a charity rather than selling it, you won’t pay capital gains taxes of $7,500 and the charity receives the full value! In our example, this option increases your donation to the charitable organization from $47,500 to $55,000. And that increases the value of your charitable tax deduction at the same time! Now the tax benefit of your charitable deduction is $15,400 instead of $13,300. Any way you look at it, directly donating stock is a no-brainer.
Any charitable contribution makes a difference to the community and to those in need. But if you follow a strategy and are savvy about your donations, your gift will do double duty. The charitable organization will receive more money, and you’ll receive a bigger tax deduction to boot! Be sure you understand all your options and the way each will impact your particular situation before making your donations. Consult your advisor to develop a win-win charitable giving strategy!
Anthony Harcourt is a Portfolio Manager with Bedel Financial Consulting Inc., a wealth management firm located in Indianapolis. For more information, visit their website at bedelfinancial.com or email Anthony.