Year-End Giving

As the holiday season and end of the year approaches, many think about meaningful ways to give. While the primary purpose of giving is to provide support to charities and those in need, there are also some significant tax benefits. Here are a few strategies to consider as you think about your year-end giving.

1. Consider gifts of long-term appreciated securities.

Gifting long-term appreciated securities has become increasingly popular in recent years, and for a good reason. Most publicly traded securities may be donated to a public charity as long as they have an investment account to receive the securities. When making this type of donation, you can claim the fair market value as an itemized deduction on your federal income tax return, up to 30% of adjusted gross income (AGI). In doing this, you avoid paying capital gains tax on the appreciation.

This method can also be beneficial if your portfolio includes “overweight positions” (positions that comprise a high percentage of your overall portfolio). Gifting shares of these overweight positions can help satisfy your philanthropic goals as well as the common goal to diversify your portfolio, all while managing the impact on your capital gains tax.

2. Consider a bunching strategy.

The 2017 tax laws increased the standard deduction and capped certain itemized deductions. As a result of those tax law changes, many tax filers no longer itemize their deductions. However, if you’re considering itemizing, a “bunching” strategy may be helpful.

Under this strategy, donations are concentrated in a single year to increase all deductions’ value beyond the standard deduction threshold. Then, in the 1-2 years that follow, smaller dollar donations are made, and the larger standard deduction is used.

To further maximize this strategy’s benefits, consider using the bunched charitable donations to offset the costs of converting a traditional IRA to a Roth IRA. Remember, thanks to the CARES Act. You now can deduct up to 100% of your Adjusted Gross Income (AGI) for cash contributions made in 2020 (this limit previously was 60%).

3. Consider establishing a donor-advised fund.

A donor-advised fund (DAF) is a giving vehicle sponsored by a public charity. Donors can contribute to the charity as frequently as they would like and claim the donation as an itemized deduction in that tax year. The donor then may recommend grants from the fund over time. This method allows donors to make a gift and qualify for a charitable deduction immediately without deciding right away on the charities to support.

4. Consider a qualified charitable distribution (QCD).

If you are at least age 72 and have an IRA, you can transfer up to $100,000 per year directly from your IRA to a charity by making a QCD. In doing this, funds are withdrawn from your IRA without any tax consequences. The act can be used to satisfy your required minimum distribution (RMD) requirement. QCD’s are not treated as charitable deductions.

Therefore, you do not have to itemize your deductions for this strategy to be effective. Alternatively, if you are subject to an RMD, you could take the RMD proceeds as a taxable distribution, then use the proceeds to make a charitable donation. Under this method, the RMD would be reported as income, but the corresponding philanthropic contribution could be used as an itemized deduction.

Please be sure to contact your financial and tax advisors to discuss the most tax-efficient way to approach your charitable year-end giving.

*Adapted from Fidelity Investments’ “Year-end strategies for charitable giving.”

Means Wealth Management prepared this information. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
This information is not intended to act as individualized tax, legal, financial, or investment advice. Please consult a qualified attorney or tax professional for individualized legal or tax advice.  Please contact a financial advisor for specific information regarding your individualized financial and investment planning needs.