Bigger bang for the charitable buck
By Chris Evers
Led by individual donations, 2015 marked a high-water mark for charitable giving. According to annual estimates by Giving USA and Indiana University, Americans gave more than $1 billion a day to philanthropies, and individuals accounted for more than 70% of the contributions.
For investors considering year-end donations, a number of options exist. Determining which works best for you can help make the most of your generosity. Some of your choices:
Arranging a Qualified Charitable Distribution
Individuals over 70½ can send a distribution from their IRAs, up to $100,000 each year, directly to a charity, and the distribution will not count as taxable income. They can use a qualified charitable distribution to satisfy their annual required minimum distribution, but they cannot also claim the donation as a charitable deduction. The IRA owner must be 70½ or older at the time of the charitable distribution. You do not have to itemize your deductions in order to use this tool.
Because of tax law changes, many investors no longer itemize deductions but simply take the standard deduction. If you do not itemize, you cannot deduct donations of cash or securities, outside of qualified charitable distributions. A strategy known as “bunching” involves doubling up two year’s worth of deductions such as charitable gifts, property taxes and medical expenses into one year. The taxpayer then itemizes deductions for that year and returns to the standard deduction in the alternative year.
The simplest way to be charitable with investment assets is by sending cash to a charity of your choice. If you itemize deductions on your income tax return, you can deduct qualified charitable contributions, including cash gifts. This may be the easiest way to get money to causes you care about, but other methods can offer greater tax advantages. Deductible cash donations are limited to 60% of your adjusted gross income for the year.
This adds another layer of potential benefit for highly appreciated assets (stocks, bonds, mutual funds and exchange-traded funds) that you have held for over a year. In addition to the charitable deduction for the value of your donation, you can also avoid realizing the gains on the investment and paying the resulting capital gains taxes. Deductibility for such donations is limited to 30% of adjusted gross income. For securities donated after less than a year of ownership, only the cost basis is deductible.
Giving to a Donor-Advised Fund
This is a powerful option that is becoming more popular and can be useful for investors choosing to “bunch” deductions every other year.
A donor-advised fund lets an individual make an irrevocable contribution to a special managed account set up through a mutual fund family or brokerage firm. The contributions are tax-deductible in the year they’re made, and the donor can delay when to distribute assets from the fund to qualified charities.
While charitable giving doesn’t need a tax strategy to have an impact, investors can find a way to try to make the most of the assets they decide to donate. The best way to donate to a charity can be different for each individual, so it can pay to discuss it with a tax professional.
Chris Evers is a registered representative and associate at Landaas & Company.
(initially posted Dec. 2, 2016; revised Nov. 21, 2019)