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5 Tax-Savvy Ways to be Charitable
In the chaos of a global pandemic , charitable giving has been on the rise . Donors responded generously to meet a variety of medical and economic needs brought on by COVID-19 . These altruistic thoughts can , of course , be combined with year-end strategies for charitable giving and tax savings .
Fidelity Charitable has outlined 5 tax-savvy ways to make your giving go further this year and next .
Giving long-term appreciated securities rather than cash .
The most common method of charitable giving is by check or cash donation . That said , you can also donate highly appreciated publicly traded securities such as stocks , bonds or mutual funds . When the donation is made , the donor can claim the fair market value of the security as an itemized deduction on their federal income tax return . By transferring the security in kind ( not selling it ), the donor will deduct the fair market value of the security ( up to 30 % of the donors adjusted gross income ) and pay no capital gains tax . Depending on the donor ’ s tax bracket , this is an additional tax savings of 15 to 20 %!
Consider establishing a donor advised fund .
A donor advised fund ( DAF ) is a giving vehicle sponsored by a public charity . It allows donors to make a charitable contribution to the public charity and receive an immediate tax deduction . As the donor , you can then recommend grants to your favorite qualified 501 ( c )( 3 ) public charities from your DAF .
The 2017 tax law raised the standard deduction to $ 24,800 ( for married taxpayers filing jointly in 2020 ) and put a $ 10,000 cap on the state and local income tax deduction . Consequently , many taxpayers who qualify for the standard deduction are unable to derive a tax benefit from their donations to church or charities .
By opening a DAF , you can “ bunch ” your donations into one year and receive a deduction by exceeding the standard deduction credit . For example , if you typically give $ 5,000 per year to your church , you could possibly deposit $ 25,000 into a DAF , obtain a tax deduction , and then direct $ 5,000 to your church each year for the next five years .
Consider using a charitable donation to offset the tax costs of converting a Traditional IRA to a Roth IRA .
It is not uncommon for an individual to accumulate the majority of their assets in a 401 ( k ) or other qualified plan . These plans represent a great way to accumulate assets in that the money is invested pretax and grows tax deferred . However , upon retirement these assets can turn into a bit of a tax trap since every dollar you withdraw is 100 % taxable . On the other hand , deposits into a Roth IRA is after tax , but accumulates tax free and can be withdrawn tax-free . You can convert a Traditional IRA to a Roth IRA , but you will be taxed on the amount converted . That said , making a charitable donation possibly into a DAF might be a good way to offset the tax cost of a conversion from IRA to
Roth IRA and develop a charitable giving plan for the future at the same time .
Consider donating complex assets .
Donors may also contribute complex and illiquid assets such as the stock from a closely held corporation , restricted stock , real estate , or other long-term appreciated property directly to charity . The process for making this kind of donation requires more time and effort than donating publicly traded securities but it does have advantages . For example , for entrepreneurs who have founded their own companies , the cost basis of their private C Corp or S Corp stock may effectively be zero . By donating stock to charity prior to a sale , the owner will pay less in capital gains tax .
Consider a qualified charitable distribution ( QCD ) from an IRA .
If you are at least 70 ½ , have an IRA , and plan to donate to charity this year , another consideration may be to make a QCD from your IRA . This action can satisfy charitable goals and allows funds to be withdrawn from an IRA without any tax consequences . The QCD can also be appealing because it can be used to satisfy your required minimum distribution up to $ 100,000 . For those who do not need all or any of their required minimum distribution for income to support their lifestyle , the QCD is a great way to fund their charitable giving and save taxes at the same time .
In 2020 , the CARES act temporarily waived the required minimum distribution for IRAs and retirement plans . However , you can still make a QCD without any tax consequences .
Caveat : DAF sponsors such as the Pittsburgh Foundation , Fidelity Charitable , and Schwab Charitable are not eligible recipients for QCD ’ s even though they are public charities .
These strategies , if properly employed , represent a tax advantaged way for you to give more to your favorite charities . Before undertaking any of these giving strategies , however , you should consult with your legal , tax , or financial advisor . The examples provided in this piece are for illustrative and educational purposes .
Fidelity Charitable , “ Year End Strategies for Charitable Giving ,” “ Fidelity Viewpoints ” October 5 , 2020
This Industry Insight was written by Garrett S . Hoge .
Garrett S . Hoge , CFP ®, ChFC ®, MS of H Financial Management , is a private wealth manager based in Southpointe serving the ever-changing financial needs of his clients . Please contact Garrett at H Financial Management , 400 Southpointe Blvd ., # 420 , Canonsburg , PA 15317 , Phone : 724.745.9406 , Email : garrett @ hfinancial . net , or via the Web : www . hfinancialmanagement . com .
Securities offered through Triad Advisors , LLC , Member FINRA / SIPC • Advisory Services offered through H Financial Management .
H Financial Management is not affiliated with Triad Advisors , LLC .
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