Stop Giving to Charity…in Cash
Before you get the wrong impression of the headline, I think giving to charity is great. In fact, I think people should do more of it. This article, however, wasn’t written to change your attitude about charitable giving, but about the method in which you administer your gifts.
For those that are charitably inclined, there are opportunities to take advantage of some unique ways to give to charity that may provide additional tax incentives, above and beyond the itemized deduction that comes with every charitable gift.
Why is this important?
With the release of the Tax Cuts and Jobs Act of 2017, the standard deduction rose for both individuals and married couples, each by almost 100%. In 2019, the standard deduction is $12,200 for an individual and $24,400 for a married couple. This means that with a higher standard deduction, less people will likely itemize because their itemized deductions will not exceed those marks, even when including their charitable giving. And, because many people don’t give to charity primarily for tax reasons and will presumably continue to give, many charitable gifts in 2019 and beyond will essentially go unrewarded from a tax standpoint.
In the aftermath of the TCJA of 2017, strategies like using Donor Advised Funds (DAFs) and taking Qualified Charitable Distributions (QCDs) have increased in popularity. However, there is another method of charitable giving that could even be simpler for the donor; donating assets, not cash.
How Does It Work?
Donating assets like property or securities could benefit the donor by protecting the donor from having to pay capital gains tax that may be imbedded in the assets they own. Shares of stock, for example, with unrealized gains can be gifted with no capital gains tax assessed to the donor at the time of the donation. And, the charity then can sell the asset upon receipt at no tax to them.
For example, let’s assume you have a taxable, non-IRA brokerage account worth $500,000. And, let’s also assume you have unrealized capital gains of $100,000 on the securities in the account. Instead of continuing to give to charity from your regular income sources and cash flow, you can gift your securities directly to the charity of your choice.
If you typically gift $10,000 per year, then you could essentially save yourself $100,000 in capital gains over a 10-year period by gifting your securities directly. Capital gains taxes are typically assessed at a rate of 15% – 20%, based on the taxpayer’s AGI (Adjusted Gross Income).1 In dollars, that could save upwards of $15,000 – $20,000 in taxes.
And again, if the charity decides to sell your stock or mutual fund upon receipt, there are no tax consequences for them.
What About My Account
The next question donors usually have is, what about my investment account? If donations are coming out of the investment account, there is a concern that the account will become depleted to nothing. The answer is simple. If charitable gifts were previously made from income sources like your Social Security benefit or a pension, you can simply replenish your investment account in the amount of your gift from those same sources.
This will not only maintain the value of your investment account, but it will raise your cost basis in whatever securities you purchase, essentially lowering any capital gains taxes you’ll be responsible for in the future.
Double-Whammy Tax Savings
As previously mentioned, one strategy that has gained popularity in response to the TCJA of 2017 is the use of Donor-Advised Funds. This is where donors bunch their charitable giving into one year by taking a lump sum amount and donating to a Donor-Advised Fund, where they can essentially direct gifts from in the future. However, the tax deduction occurs in the year when the initial lump sum is deposited into the Donor-Advised Fund.
For this strategy to produce optimal results, some clients will often lump large amounts into a Donor-Advised Fund to account for their charitable giving over a long period of time. For example, they might move $100,000 into a Donor-Advised Fund to account for 10 years of charitable giving (assuming gifts of $10,000/year). Again, the donor then can disperse gifts as desired over that time, to whom they choose, as long as it is a charitable organization.
Of course, this begs the question, can appreciated securities with large imbedded capital gains be gifted as part of a Donor-Advised Fund strategy? The answer is yes. The donor would not only save on capital gains tax by gifting securities instead of cash but would also benefit from the bunching of donations into one tax year with a Donor-Advised Fund. Pretty cool, huh?
Giving back to good, charitable organizations is very important. In fact, I would venture to say we can all do more of it. However, we can also be smart about how we give. Donating appreciated assets to charitable organizations is a smart way to potentially reduce your tax liability. And, most charities are setup that they are prepared and able to receive such gifts.
Be sure you consult with a professional before you make any tax-planning or investment-related decisions. A CERTIFIED FINANCIAL PLANNER™ professional may be able to help you determine if you have an opportunity to take advantage of this charitable giving method.
1Taxpayers who fall under a certain income threshold may potentially pay 0% tax on capital gains. In 2019, those income thresholds are $39,350 for single filers, $78,750 for married filers, or $52,750 for heads of households.
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