Most taxpayers will continue donating to their favorite charity at holiday time no matter what deduction they can or cannot claim. Donating appreciated stocks, bonds or other assets instead of cash still avoids all capital gains taxes whether or not a donor itemizes.
Most folks don’t give to charity just to get a tax deduction, but it’s still a good idea for everyone to plan ahead to pick the perfect gifting solution. We can help donors navigate the tangled web of tax reform and donation options, and assist with the complex calculations related to charitable gifts like the carryover charitable deduction, and applying it in following years.
Our tax professionals are ready to work with you to achieve your charitable goals as well as your financial ones! Let us suggest several attractive giving options and gift techniques to consider.
What’s Best – Cash or Stocks: Stuck between the idea of giving your favorite charity cash or giving appreciated assets like stock? Give the appreciated assets because there are two tax benefits to be had:
- The income tax deduction, and
- The avoidance of the capital gains in an appreciated asset.
When you give cash you get only the first benefit, but if you give a capital asset like appreciated stock, you can deduct the full market value of the investment without having to pay capital gains tax on the appreciation. You don’t recognize the gain and you get the deduction to apply against different income. Gifting highly appreciated stocks can be a win-win situation for the donor and the charity. When you gift stock to qualified charities, you don’t pay capital gains tax on the stock — and neither does the charity. In essence, you end up gifting the full value of your stock and having a greater impact than if you had sold your stock first, paid the capital gains tax liability, and then made the charitable donation!
Consider establishing an annual gifting amount, if you have highly appreciated, low-cost basis stocks in your investment portfolio. Talk to your TFG financial or tax advisor about which stocks make sense to donate. You can also discuss how much to gift per year based on your individual tax situation.
“Bunching” Charitable Gifts: Donors can use strategies like “Bunching” Charitable Gifts into a single year instead of paying them out over two years to meet the threshold for itemizing.
Donor Advised Funds: When making a large gift to exceed the standard deduction amount in order to claim the itemized deduction benefit, consider vehicles such as Donor Advised Funds which allow you to have a voice in how and to whom those funds are disbursed over the years ahead. However, to use that strategy, clients need to plan ahead. This is a great strategy when clients have high tax bill due to the sale of a business, stock, or real estate, and are looking for an increased charitable deduction to offset against an increase in income. Unlike private foundations, donor-advised funds require less maintenance since the recordkeeping is handled by the fund custodian. Once you open a donor-advised fund, you will receive a tax deduction in the year you fund it. You can decide which charities you want to benefit at a future date, which allows your funds to keep growing for as long as you want while also maximizing your donations.
Qualified Charitable Distribution: Did you know that, if you are at least 70½ years old, you can make tax-free charitable donations directly from your IRA? Making a Qualified Charitable Distribution (QCD) can exclude up to $105,000 annually from gross income while benefitting your favorite charity. If you file jointly, your spouse (if 70½ or older) can also exclude $105,000 of QCDs, for a potential total of $210,000. These “charitable IRA rollovers” are gifts that would otherwise be taxable IRA distributions. How do you do this?
It’s easier than you think to make a QCD. Instruct your IRA trustee to distribute directly from your IRA to a qualified charity of your choosing. The distribution must be one that would otherwise be taxable to you.
- A QCD can provide several potential benefits. It may be a suitable giving strategy for donors who:
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- Are required to take a minimum distribution from an IRA, but don’t need the funds and would face increased tax liabilities if they took the distribution as income.
- Would like to reduce the balance in an IRA to lower future required minimum distributions.
- Certain Rules Apply:
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- Your QCD cannot be made to a private foundation, donor-advised fund, or supporting organization. You are able to make a one-time QCD of up to $53,000 to a charitable remainder annuity trust, a charitable remainder trust, or charitable gift annuity.
- QCDs count toward satisfying any Required Minimum Distributions (RMDs) that you would otherwise have to receive from your IRA. The caveat is that distributions you actually receive from your IRA (including RMDs) and subsequently gift or transfer to a charity cannot qualify as QCDs.
- If you plan to offset your RMD with a QCD, the transactions must be done in conjunction with one another. You cannot take an RMD and retroactively use those dollars to make a QCD. That would conflict with the “first-dollars-out rule,” which states that the first dollars taken from your IRA will satisfy any required RMD.
Charitable Remainder Trust: Gift your assets while taking advantage of income generation! A Charitable Remainder Trust allows you to draw income from the trust each year for life or for a specified term. The remaining trust assets are then gifted to a charity of your choice. Charitable Lead Trusts are essentially the inverse, where income is paid out to charities each year for a specified term, and the remainder is then distributed to your trust beneficiaries.
A charitable remainder trust is a tax-exempt irrevocable trust designed to reduce taxable income by first dispersing income to the trust beneficiaries for a specific period and then donating the remainder of the trust funds to your designated charity. You can take an income tax deduction spread over 5 years for the value of your gift minus any income received from the property. You can receive an annuity or set up your annual payment as a percentage of the value of the trust. CRTs work well with appreciated assets also, like stock, securities, and real estate. Charities don’t pay capital gains tax, so if and when the charity sells your property, the proceeds stay in the trust and aren’t taxed. When the trust property eventually goes to the charity, it’s no longer in your estate and it isn’t subject to federal estate tax.
Qualified Contributions Lower Tax Bills: If you itemize deductions on your tax return, charitable donations can help you lower your taxable income up to 60% of your adjusted gross income (AGI) for donations to public charities and up to 30% for donations made to certain private foundations, veterans organizations, fraternal societies, etc. Any dollars gifted above these limits can be carried forward for five subsequent tax years. Your AGI limit percentage also varies by the type of asset you’re donating, whether it’s cash, capital gains property (typically investments held longer than one year), or ordinary income property. Make sure to work with your TFG CPA to itemize deductions, and keep good records (see below).
Be Meticulous with Paperwork: Gifts can include cash, securities, real estate, art, clothes, books, and more. If you volunteer your time, the IRS even lets you deduct miles driven in service of charitable organizations (14 cents per mile for 2024). When claiming a charitable contribution deduction, be sure to follow these steps:
- Make sure the non-profit organization is a 501(c)(3)
- Keep a record of the contribution or the tax receipt from the charity
- With non-cash donations a qualified appraisal may be required to substantiate the value and the deduction you’re claiming
- Send the paperwork to your Fuoco professional for preparation of your tax return.
Beware of Scams: Be wary of scams regarding charitable giving that often pop up after disasters of any kind. Scammers will set up bogus charities to take advantage of the public’s generosity, and they will steel your money as well as your sensitive personal information. You can check whether or not a charity is real through a link to the IRS website: https://www.irs.gov/charities-non-profits/tax-exempt-organization-search
Reach out to us: Before you give, talk to your TFG tax advisor about your charitable giving intentions and how you can optimize tax savings while accomplishing your charitable goals. It’s important to properly research charities to ensure they’re financially healthy, that they qualify for a charitable deduction, and that they also allocate donations in a way that leads to positive results for both the organization and the community. Don’t wait till the last minute, complex transactions take time, and donations are due by December 31st. Call us toll free 855-542-7537, or email CPA@fuoco.com.
For our non-profit clients, let us say this: People donate because they are passionate about a cause, and tax reform still gives itemizers and non-itemizers, as well as corporations, more money to give. Charitable organizations should construct a multiyear budget which will allow for volatility in revenue (remember those “bundling” donors) and more long-term planning. Open communication with donors regarding the need, the gifting vehicle, timing and size of their planned contributions is critical.
