EXTRACT FROM https://bit.ly/3HCYyxB
Spurred in part by the pandemic, a record $471 billion was donated to U.S. charities in 2020, according to Giving USA. I expect that trend to continue this year, as individuals, couples and families are inspired, perhaps more so than years prior, to make an impact on their communities and the causes they care about.
For those planning to contribute to charitable organizations this year, consider these strategies to make the most tax-efficient donation.
A check may not be the smartest gift
A common mistake I often see novice donors make is their preference to cut a check to a charity, assuming it’s the simplest and most effective route. Given the stock market’s solid 10-year run, donors may want to instead consider gifting appreciated securities, or concentrated positions if they are seeking to trim portfolio holdings.
When an individual donates, for example, $5,000 in appreciated securities, versus $5,000 in cash, they reap a handful of benefits. Not only does this rebalance their portfolio, but it provides a tax deduction incentive – the donation can reduce taxable income, but only if the recipient organization qualifies (use this IRS tool to search all tax-exempt charities). Additionally, the donation allows the donor to avoid paying capital gains tax on the security. The charity also avoids taxes when they sell the donated investment.
For some novice philanthropists, it’s tempting to gift cash, however, gifting securities can be the far more strategic and tax-efficient approach for the donor, and encourage further giving to benefit charitable organizations.
Expanding a charitable footprint
According to the Giving USA report, donations to education, human services and environmental and animal organizations were estimated to have the highest increases in 2020. For my clients who are interested in expanding their giving – whether increasing the amount they give or opting to donate to multiple causes – I’ve recommended they use the Nonprofit Aid Visualizer (NAVI), powered by Vanguard Charitable. This tool pinpoints charities most impacted by the pandemic, giving individuals a clear picture of the giving landscape and organizations most in need.
For an experienced philanthropist who may be inspired to donate more this year than in previous years, they may consider “stacking” a donation. This allows the ability to deduct up to 30% of a donor’s adjusted gross income (AGI) by gifting appreciated securities, and then another 30% in cash (or another 20% in cash if donating to a donor advised fund), providing a tax deduction on both the securities and cash gifts. While the advantage of stacking allows a donor to utilize appreciated securities, it is worth noting that for the extremely philanthropic, the CARES Act and Coronavirus Stimulus Act increased the ability to deduct up to 100% of a donor’s AGI if contributing cash to an operating charity this year.
Aside from stacking, another strategy for a seasoned donor is gifting securities through a donor advised fund (DAF), a charitable giving account that allows a donor to invest, grow and give assets.
If a donor is planning to give to multiple charities this year, but doesn’t exactly know what causes to contribute to, a DAF is a good parking spot. The donor can take the immediate tax deduction once the DAF is funded, and decide which charities receive the funds at a future date. Additionally, a DAF enables a donor to piecemeal their donations out. For example, with $25,000 in the DAF, that amount can be gifted in full to one charity or separated to five charities receiving $5,000 each — and the donations can be made over the course of several years.
Age-specific considerations
Aside from philanthropic experience, there are also tax-efficient charitable giving strategies tied to a donor’s age. A qualified charitable distribution (QCD) is a great way to gift dollars to charity for donors who are at least 70½ (Question: Just want to make sure this shouldn’t be 72. Answer is YES.) at the time of the distribution. This strategy allows a donor to utilize dollars from their IRA to donate directly to a qualified organization. For those in a high tax bracket, this can be a tax-efficient way to spend down an IRA while avoiding ordinary income taxes – which would otherwise be due on distributions – since the dollars are being donated. Additionally, annual required minimum distributions (RMDs) can be donated to a qualified charity (up to $100,000), which can minimize the RMD’s tax consequences.
