This column was originally published in the Tacoma News Tribune Business section Sunday November 6, 2016.
By Gary Brooks, CFP®
Giving season is upon us but not only in the form of thanks or holiday gifts. It is also prime time for charitable giving. As we move toward the close of the year, many people use this time to express what they are grateful for through donations to causes that matter to them.
Commonly, this means check writing or credit card charges making cash gifts to non-profit organizations. While this is convenient, for many people it is not the most efficient use of financial means for charitable intent.
From a personal financial planning perspective, supporting causes you believe in may be best done from places other than your checking account. There are many ways to go about this but here are three opportunities in particular that are underutilized.
IRA Charitable Distribution
Holders of pre-tax Individual Retirement Accounts who are over age 70½ are required to withdraw a minimum annual amount from their account each year. This amount is usually fully taxable at the holder’s marginal federal income tax rates. But not everyone actually needs this money to meet their living expenses. Sometimes, this taxable income even pushes people into higher-cost Medicare benefits and a higher tax bracket.
Rather than making this withdrawal and paying federal income tax on the amount, you can have the withdrawal sent directly to a charitable organization instead. You don’t owe any income tax on the amount given and neither does the charity. You effectively give pre-tax dollars to the non-profit organization. This is much better than taking the IRA distribution, realizing it as ordinary taxable income and then donating the remaining cash.
The qualified charitable distribution can be done with up to $100,000 (or the amount of your required distribution if less) each year. Not all of your required distribution has to go to charity. You can take some and donate the rest. The donation doesn’t need to go to just one organization. If you prefer, you can have several small checks written directly from your IRA.
If you have investments outside of retirement accounts which have grown in value over time, you can avoid capital gains taxes by donating shares of the investment. The organization you are donating to needs to have an investment account to receive the gifted securities. They receive the full value of the position and are not responsible for capital gains tax on the growth when they sell the holding.
This can work for any stock, bond, mutual fund or other holding as long as the non-profit can accept the investment. A scenario where this is particularly useful is when you don’t know the cost basis for the investment. If you know there is a taxable gain in the investment but you don’t know what your original purchase price was – or what your basis has grown to as you’ve reinvested dividends in the investment many times over the years – this makes an ideal giving vehicle. You eliminate the headache of trying to figure out the cost basis. You receive a tax deduction for its value on the date of transfer and its cost basis is a non-issue for the charitable organization.
Go Big, Then Take a Break
Charitable organizations love it when they can count on you for a recurring gift each year. Depending on your income tax situation, however, it may be beneficial to make a more substantial gift one year and then pause, or reduce your gift, the next year or two.
This can be advantageous if a larger gift in one year improves your ability to claim itemized deductions on your income tax return that you wouldn’t be eligible for if giving smaller gifts each year. This scenario requires some tax planning with your accountant and coordination with other deductible elements of your tax return. But it is generally fitting with the idea that the more tax efficient you can be with your donations, the more win-win opportunities you can create between you and the causes you support.
Of course, there are many other strategies and vehicles for charitable giving. You might like to contribute to a donor-advised fund to receive a current tax deduction but not need to distribute money to non-profits until later. Or, you might prefer to get some form of income back to you which can be accomplished with a gift annuity or charitable trust.
The level of complexity in your giving may be linked to the sophistication of your estate planning or the diversity of your charitable intent. While many people give directly to their alma mater or faith organization, there are many non-profit organizations and community foundations that have staff to help you identify the best fit to match your intent and your financial preferences. Utilize them, they’ll be happy you called.
Gary Brooks is a certified financial planner and the president of Brooks, Hughes & Jones, a registered investment adviser in Gig Harbor. Reach him at firstname.lastname@example.org.
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