As we approach the end of the calendar year, many people start to turn their attention towards their charitable giving plans. It is through charitable work and donations that people are able to express their hopes and fears for our society and try to do their bit to make the world a better place, now and in the future. While donating time, energy, resources or money can be done in a myriad of ways, often it is done through the giving of funds to a specific charity that does work for causes we appreciate and want to support. And, while I would never recommend that someone give just to get, if you are going to give to charity, you might as well do so in a manner that is as beneficial as possible, for both the charity and yourself. With that in mind, here are two simple strategies to consider to get the most from your charitable inclinations.
Donating Appreciated Assets –
This time of year, I often have clients who call and ask me to sell a portion of their assets and send them the money to donate to their favorite charities. This is, of course, wonderful, but not always the best way to proceed from a tax-planning standpoint. One idea to consider is the possibility of donating appreciated assets, such as stocks, bonds or real estate, directly to the charity, in lieu of selling the assets first and then sending the net proceeds to the charity.
When you sell an appreciated asset that is held in a non-retirement account, there are tax ramifications and sometimes fees for the sale. If, on the other hand, you donate the appreciated assets themselves directly to a qualified charity, the charity can then sell the assets and likely avoid paying any taxes on the sale. A charity designated as a 501(C)3 is a tax-exempt organization, whereas individuals and regular non-charitable companies are not. Thus, by giving appreciated assets directly to the charity, you avoid the tax hit that would have been due from you on the sale, without placing any tax burden on the charity either. And if the organization you are donating to is set up for it, they may even prefer to keep the stock (or other assets) for future appreciation potential, so that they can better control the timing of the cash inflow and sell the funds when they are most needed. This is one of those rare win-win situations, the only loser here, of course, being the IRS.
Here is an example…
Let’s say you bought a stock many years ago for $1,000 and it is now worth $10,000. If you were to sell the stock in a non-retirement (i.e., taxable) account, and donate the proceeds to charity, you would owe taxes on the $9,000 of gain. In this situation, assuming a 30% combined federal and state capital-gains tax rate, you would owe $2,700 in taxes. As such, your $10,0000 donation would actually cost you $12,700 in total. Or, if you didn’t want your total cost to be more than $10,000, you could choose, instead of donating the full $10,000, to only donate $7,300 (the $10,000 minus the taxes.) However, if you had donated the appreciated stock directly to the charity, it would cost you exactly $10,000, the charity would receive exactly $10,000, and there would be no tax owed by either party.
Donating from an IRA account (for those over 70.5) –
In the year you turn 72 years old, the government forces you to start taking money from your IRAs, old 401(k)s and other retirement accounts. This is called a “Required Minimum Distribution (RMD)”. For people over 70.5 years old, you can give up to $100,000 per year from your IRA to qualified charities and avoid paying taxes on these distributions. Again, I would never recommend donating money to a charity just for the tax deduction (that is like spending a dollar to get back forty cents), but if you are planning to donate to a charity, and you are subject to an RMD, then why not make the best of the situation?
Many people who don’t know about this strategy give money to their favorite charities from their bank account or from their non-retirement investment accounts. And then, when they take their annual RMD, they put that money back into their bank account or investment account, minus taxes, thereby replenishing some, or all of what was given to the charity. In this situation, all they have done is pay taxes unnecessarily. If, instead, these same people had donated directly from their IRAs to their charity of choice, they would have accomplished the exact same thing, but done so without owing any taxes.
One thing to keep in mind about this strategy is that the money going to the charity has to come directly from your IRA. In other words, it can never touch the donating individual’s hands. If you have the money sent from your IRA to your bank account, and then use a check from your non-IRA bank account to give to the charity, you have nullified the tax-advantage of this strategy.
Another thing to remember about charitable giving from your IRA is that anyone can do it, and anyone can give up to $100,000, as long as they are (or will turn) at least 70.5 in the year of the donation. As such, you can actually give more or less than your RMD amount, and you can actually do this starting at age 70.5, even though RMDs are now not necessary until age 72. This is because the RMD age was recently changed from 70.5 to 72, but the rule governing the age for charitable giving from an IRA did not change.
One final thing to consider: people often assume that it does not matter if they donate from their cash after receiving an RMD, since they will get a write-off for the donation of cash. They think that, net-net, they would be in the same place as if they had donated directly from their IRA and not paid taxes in the first place. While this may be partially true, due to recent changes in the tax law, the amount you can deduct for each specific charitable donation has, in many cases, been severely limited, and in some cases, eliminated completely. Therefore, it actually is often better to donate directly from your IRA when you are at or over the RMD age (currently 72), because, in that way, you are likely to get the full tax benefit with no limitations, on donated amounts of up to $100,000.
Here is an example…
Let’s say you are age 72 (or older) and your Required Minimum Distribution (RMD) from your Traditional IRA is $10,000. If you were to take that $10,000 distribution from your IRA as you are required to do, assuming a 40% combined federal and state ordinary income-tax bracket (you pay ordinary income tax rates on IRA withdrawals, not capital gains rates), you would net $6,000 on the sale, and the IRS and the state would get the additional $4,000 for taxes owed. If, instead, you donated that $10,000 directly from your IRA to your charity of choice, you would not owe any taxes on the distribution and neither would the receiving charity.
In summary, charitable giving is rewarding on so many levels, but if you are going to give, be sure to take the time to do so in a way that is most beneficial, both to you and to the charity you are supporting.
We are not tax-experts and are not offering tax-advice here. Please discuss al tax matters with your tax-consultant and/or attorney before making any decisions.
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