Wealth Management: Framing Your Philanthropy for a Season of Giving

The holidays are often referred to as the season of giving and they provide for the opportunity to express gratitude by giving back. An effective charitable giving strategy can maximize the impact of the donor’s intentions by increasing the capacity to give, resulting in greater benefit to both the donor and the receiving organizations.

The following is a discussion of several tax strategies taxpayers should take into consideration when addressing their year-end giving.

Tip #1: Donate appreciated securities

If you itemize your deductions on Schedule A, one of the simplest strategies involves donating appreciated securities.  For example, say you have some low-basis Tesla or Apple stock purchased years ago that has significantly appreciated in value. Instead of selling shares of the stock, recognizing, and paying tax on the gain, and then donating the remaining cash to a charity of choice, you could simply donate the stock directly to the charity (most charities are now set up to receive stock donations). By doing so, you would avoid capital gains tax on the price appreciation and allow the charity to receive a greater donation. 

If you wanted to keep the stock positions in your portfolio, you could buy the shares back at market, effectively giving yourself a step-up in basis. In this situation the wash sale rules (buying and selling the same stock within 30 days) do not apply since you did not sell at a loss.  Certain income limits may apply. 

Tip #2: Take advantage of special 

COVID-related charitable provisions

For taxpayers who do not itemize, the Consolidated Appropriations Act provides for a deduction from adjusted gross income for cash contributions made to public charities. For 2021, the deduction limits for individuals and married filing jointly taxpayers are $300 and $600, respectively.

Tip #3: Give from your IRA

If you are over age 70 you can make a Qualified Charitable Distribution (QCD) and contribute each year up to $100,000 directly from your IRA tax-free to charity. QCDs provide many benefits. First, if you are subject to a Required Minimum Distribution (RMD), QCDs will count towards satisfying the amount of your RMD. Second, QCDs are treated as non-taxable distributions from your IRA. While you don’t get to take a charitable deduction on your Schedule A, you also don’t have to include the QCD as income. Because of the tax treatment, QCDs work best in conjunction with your Traditional IRA’s annual RMD.

Tip #4: Bunch donations to maximize your deduction

The Tax Cuts and Jobs Act of 2017 essentially doubled the standard deduction (now $25,100 in 2021), while also limiting the state and local income tax (SALT) deduction on Schedule A to $10,000. For 2021, a Married Filing Joint couple would need over $15,100 of mortgage interest and/or charitable contributions to benefit from itemizing on Schedule A (assuming they hit the $10,000 SALT limit). If you are at or near the threshold for itemizing your deductions in 2021, it could be advantageous to bunch two or more years of charitable contributions into 2021 in order to itemize and then claim the standard deduction in subsequent years.

Contributing to a Donor Advised Fund (DAF) is a great way to maximize this strategy as contributions are fully deductible in the year made. Therefore, you could “super-fund” the DAF (including donating appreciated securities) in year one and subsequently direct contributions in future years. 

In summary, charitable deduction strategies are even more beneficial in years when the donor has high income, such as a business sale or large bonus. Similarly, charitable deduction strategies can be paired with tax strategies that trigger income. For example, charitable donations can be used to help offset the tax liability on additional income from Roth conversions. Taxpayers can implement these strategies at any time, but tax planning is the key to success.

Tax talk aside, year-end is a time to reflect. Being smart about how and when we give can make a world of difference to our loved ones and to the charities near and dear to our hearts.

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