November 11, 2021

Family Finances

How to give to charity in the most tax-efficient manner

Whether it’s giving Tuesday or end-of-year outreach, many non-profits will be asking their supporters for donations as we head into holiday season & year-end. To our readers who are charitably inclined, first let us say thanks for your generosity helping those in need. We also want to make sure you are giving your money in the most tax-efficient way possible. The three things we’ll go over in this article are gifting appreciated securities, Qualified Charitable Distributions (QCDs), and Donor Advised Funds (DAFs).

Gifting appreciated securities: If you plan on making a donation over a few hundred dollars, and you plan on writing a check, you’re probably making a mistake. A better option is to gift appreciated securities. With how much the market has gone up in recent years, there’s a good chance you have some after-tax (brokerage) holdings bought at a low price compared to what they’re worth now. If you were to sell the stock and gift the cash, you’d pay taxes on the gain. By gifting the appreciated security directly, you avoid paying the capital gains taxes.

Making the transfer is easy, you submit a form to your custodian (Schwab or TD) with details on what stock you want to gift and information on the non-profit receiving the gift. You can also donate the appreciated securities to a donor advised fund. The dollar benefit will vary based on how much of the gift is unrealized gain, your tax bracket, and if you’re itemizing. For some, a $10,000 gift will only cost you $2,500 or less on an after-tax basis.

Qualified Charitable Distributions: This option is limited to people aged 70.5 and over. With a QCD, you donate funds directly from your IRA to the charity. The advantage of this is the distribution never shows up on your tax return. This is most beneficial to individuals who give less than fifteen thousand dollars a year, so they don’t itemize on their tax return. If you aren’t itemizing, and instead taking the standard deduction, you don’t receive the tax write-off for a cash donation. By doing a QCD, you get the tax benefit. A lesser advantage is it may keep some people’s adjusted gross income (AGI) below a breakpoint where they would have to pay more for their Medicare Part B Premium. Similar to gifting appreciated securities, this just requires a form instructing the custodian to distribute the funds to your chosen charity.

Donor Advised Fund: These accounts make sense if you plan on giving $5,000 – $15,000 each year for the next several years – this amount isn’t enough in a single year to get a deduction. So rather than give $10,000 each of the next five years, give $50,000 this year and then none for the next four. This way you get the tax deduction for most of your gift. The funds that remain in the account get invested and hopefully appreciate over that time allowing you to give more. Charles Schwab has a great donor advised program we can help you open. Like we mentioned above, these are best funded with highly appreciated securities.

These are some guidelines to consider when making end-of-year donations. Please reach out to your Rockbridge advisor with questions on how your gifting desires mesh with your specific financial situation.

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