Tis the season…for giving! Yes, we all like to receive – but I know many of you find even more joy in giving. While you may already be busy buying those gifts for under the Christmas tree (with all of the horror stories of backordered items, we wouldn’t blame you) – we’re going to talk today about charitable giving. This is the time of year where we find ourselves at many charity galas and receiving innumerable year-end giving pleas from our favorite organizations, and we want to help you think about how to show your financial generosity in the most powerful and tax-friendly ways.
If you are inclined towards giving in this way, this piece is for you. We’ll start by saying “don’t give another dollar…of cash.” Actually, there could be good reason to give cash if you are giving at extraordinary levels relative to your adjusted gross income, but for most of us, I will say it again, “don’t give another dollar…of cash.” No, this does not mean to start giving just your household junk or only giving of your time, it simply means there is most likely a more tax-efficient way for you to give than to give with cash. This generally falls into one of two categories, though we can certainly get more complex in some cases:
- For those with taxable (aka, “non-retirement”) investment assets, give appreciated securities.
- For those age 70-1/2, give via a ‘Qualified Charitable Distribution (QCD) from your Traditional IRA.
Our focus today is going to be on option #1 from above. After the significant run that the stock market has been on for the past many months, you likely have appreciated assets sitting in your taxable account. If you were to sell them, you would incur capital gains taxes on the profits. If you instead choose to give these assets to a charity (or Donor Advised Fund) prior to selling them, you can fully avoid those capital gains taxes, resulting in a more tax-efficient way to give. Let’s look at an example using an actual asset sitting in most of your accounts:
As you can see here, by giving this asset in-kind, the donor saves anywhere from $979-1,553 in capital gains taxes (depending on their applicable tax rate) and the charity receives the exact same amount as they would if you gave cash! This savings is in addition to the income tax deduction you will receive if you itemize your deductions. To me, at least, that ~$1,000+ capital gains tax savings is nothing to sniff at. Looked at another way, if this donor chose to sell the asset first to net $10,000 to give to her favorite organization, she would have to sell over $11,000 worth of stock. Why do so when giving the asset in-kind is so simple and so beneficial? We are here to help you make this happen. If you are thinking, “But wait, I want to remain invested in that asset!,” do not worry. You can simply contribute $10,000 in cash to the account, and we can re-buy it for you immediately, keeping you fully exposed to the market while resetting your cost basis to a higher level (which is always a good thing).
Is this for everyone? No! When would it not be?
- If your net taxable income is below a certain amount ($80,800 married filing jointly or $40,400 single), you would pay a 0% capital gains rate anyway, so there is likely no tax benefit of giving these assets to charity. We can do the math with you to help you determine if this is the case for you. You may still want to for future tax planning purposes, but you won’t enjoy the immediate benefit noted above.
- If you have held the asset for <12 months, you do not want to give it to charity. You only get a deduction for the full value of the contributed asset if that asset is “long-term,” meaning you have held it for >12 months. If you give a short-term asset, you can only take a deduction equal to your cost basis in that security (which would have been just $3,521 in the example above).
- As alluded to earlier, if you want to give an extraordinary amount to charity this year, then you will want to use a mix of cash and appreciated securities. Due to the pandemic, Congress is allowing you to take a deduction equal to 100% of your AGI this year under a special provision of the CARES Act. However, appreciated assets can only total 30% of your AGI, while the remainder has to be given in cash. Note that there are other important rules related to this expanded deduction limit, but we don’t want to get too far into the weeds here. Contact us if you want to explore this in greater detail.
- If you are 70-1/2 or older, you may prefer to instead give directly from your Traditional IRA using a Qualified Charitable Distribution. Click here to read a piece we put together earlier this year on this powerful giving tool.
At the end of the day, this brief piece is just meant to get you thinking in new ways about how to give and an invitation to talk more with us about what makes the most sense for YOU! Giving should never be driven solely by a desire for a tax deduction but instead by a desire to be generous and make a difference in areas that are close to your heart. However, it never hurts to maximize the deduction that can stem from that generous heart of yours. Let’s talk and help make your year-end giving as powerful as it can be.