Heading into fall, with the holidays right around the corner, many of us begin thinking about our year end charitable giving. Changes to the tax code that went into effect last year made charitable deductions harder, or impossible, for some of us to find; however, there are still some basic and effective options available for investors.
In 2018 the Tax Cuts and Jobs Act increased the standard deduction for individuals and married couples, and as a result many are no longer itemizing deductions. While these changes have impacted people in different ways, there was a big impact for those who lost the ability to deduct individual gifts to charities and nonprofits.
The real impact on charities is hard to measure at this point because there is a lot of big data and number crunching involved, but the bottom line is: the changes removed what had been a nice incentive to give, and that will take a toll on the good work of many organizations.
While you should give to worthy non-profits and charities regardless of tax implications, let’s look at two of the easiest ways to give and save on taxes too. These strategies are: donating appreciated stock, and Qualified Charitable Distributions(“QCD”) from an IRA. While they both involve investment accounts, donating stock applies to taxable accounts, and QCDs apply to certain IRA accounts.
Donating Appreciated Stock
Let’s say you want to contribute to a favorite charity, and also happen to own securities in a taxable account. If you’ve owned a stock (or fund) for more than one year and the shares have appreciated you can often donate these shares directly to a charity, and avoid the Federal capital gains tax.
This beats selling shares, paying the capital gains tax, and then donating the cash. You will have avoided the tax altogether!
This is a great strategy for long term investors (the best kind) who have been purchasing shares over long periods of time. Your brokerage or custodian tracks the cost basis on your purchases for tax reporting. With this strategy, you typically select shares with the lowest cost basis because these shares would otherwise generate the highest capital gain and tax bill.
If you want to donate company stock received as part of an incentive plan the shares can only be donated after any required holding period has lapsed.
Qualified Charitable Distribution from an IRA
While many of us own stocks within our IRAs, you cannot donate these appreciated shares directly to a non-profit or charity. The alternative here is to donate some or all of a “Required Mandatory Distribution.”
This strategy is limited to people 70 ½ and older, subject to mandatory distributions from traditional IRAs (as opposed to Roth IRAs).
With this approach you decide how much of your mandatory distribution to donate, and that amount is not subject to Federal withholding (State rules vary).
The amount donated is excluded from taxable income, which may reduce the impact to certain tax credits and deductions such as Social Security and Medicare in your favor. If you do itemize you can’t claim a deduction for the donation, sorry, the IRS frowns on double dipping.
Wrapping Up (please read this too)
While there are other options available, these are two of the easiest and most practical for many investors. Your investment advisor, accountant, or brokerage should be happy to help you make either of these happen as appropriate.
It’s important to note that this is a general overview. Everyone’s situation is unique. It’s important to consult with your CPA, tax preparer, or investment professional as you decide if either of these approaches may be appropriate for you. The professional you work with may suggest a different approach, or find that these are not ideal or appropriate for your particular situation.
As always, I’m here to answer questions about this, or anything else related to your financial life. Please don’t hesitate to reach out!
Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request.