Written by Kerry Meath-Sinkin CFP®AIF®, Partner & Wealth Advisor
Our kids attend a small school in Minneapolis. Like so many other small schools, our school doesn’t have an endowment or huge extra fund of money to support themselves during a time like this. The school needs help and families want to help. I happened to be talking to a good friend of ours about our kiddos school and they mentioned they were going to make a donation. Then they told me they were going to get the donation funds by selling some stock they have owned for a long time. Immediately, I thought to myself…NO…there would be a much more efficient way for you to do this. Simply gift the stock directly to the school and avoid paying the capital gains.
You may also be looking at ways to support organizations you care about, but I want to make sure you know your options to give in the most tax efficient way. The considerations to give efficiently have changed since the passing of the Tax Cuts and Jobs Act.
Before this act it was more common to itemize because the standard deduction was much lower. In 2017 the standard deduction was $6,350 for individuals and $12,700 for married couples. However, as a result of the Tax Cuts and Jobs Act (TCJA) the standard deduction almost doubled to $12,000 for individuals and $24,000 for married couples. The impact of this is that many of you are better off taking the standard deduction rather than itemizing deductions. This change also means that many of you will no longer be getting a deduction for charitable giving. Yet, with a little bit of planning, there are actions that you can take to be more tax efficient with your donations.
Tips to Tax Efficiently Donate to the Non-Profits You Care About
1. Donate Stocks Instead of Cash
- Don’t Pay Taxes on Your Gains:
If you sold the stock and donated the proceeds you would pay taxes on the gains. This is true for short- or long-term gains. For your long term gains you could pay up to 20% in federal taxes and for your short term gains you would pay regular income taxes. By gifting the stock directly, a donor could save thousands in unnecessary taxes.
- You Can Potentially Reduce Future Capital Gains:
You may believe in the company that has done so well, but whenever you sell that stock there will be significant gains. Consider donating some of your most highly appreciated stocks and then buying new shares to reset your cost basis at the current, higher price. This will reduce your future capital gains tax exposure if the stock continues to grow in value like you hope it will.
- Effect on Charitable Deductions:
- Long Term Gains: you are still eligible to deduct the full fair-market value of the asset you donated from your income taxes, up to the overall amount allowed by the IRS.
- Short Term Gains: An important note about short term gains is that if you’ve held it for less than a year, your eligible deduction is limited to your cost basis — what you paid for the stock — not the current value.
- Ask the charity and brokerage firm about the procedure and time frame for giving stock:
Ask the charity and brokerage firm about the procedure and time frame for giving stock. Don’t worry it should be pretty easy.
2. Bunching Strategies:
Bunching your giving makes a ton of sense for those giving $10,000-$20,000 or more annually. These people are not giving enough to take more than the standard deduction but are not receiving tax benefits like they used to from their charitable giving. Bunching is when a person bunches or lumps two or more years of charitable giving into a single tax year. For example, if you were going to make a $24,000 contribution to your favorite charities this year and next year, you could consider “bunching” your contributions into a single year, and then itemize your deductions in the year you make the contributions. This would get you above the standard deduction of $24,000 and allow you to receive some tax savings. Below you’ll find a few different methods to consider if you want to start bunching your giving.
- Gift Through A Donor Advised Fund
- A donor-advised fund is a personal separate account, in some ways similar to a private foundation, which you donate money into and then use as a bucket of money for your charitable contributions over a period of time that you control.
- We often look at a donor advised fund when one of our clients has a low cost basis stock with a large long term capital gain because they can gift that stock directly into the donor advised fund, get a tax benefit for the donation year, and use it as their charitable gifting bucket moving forward.
- A few benefits of a donor advised fund include:
- Reduces Your Gross Income in a High-Income Year: If you have a high tax year, this could be worth exploring, as well as other strategies to reduce your taxable income.
- Flexibility in the Timing of Giving: Support as many charities as you would like to over time by giving when it makes the most sense for you and the charities you are gifting to.
- Less tax fuss: There is one form to file with your tax return the first year instead of many forms for various years.
- Tax Free Growth: The donor advise fund grows tax free so there is potentially more to give over time.
- Gift Through a One Time Larger Contribution
- Instead of gifting to a charity over 5 years, you can accelerate the gift into a single year. This allows you to get a greater tax benefit in the year it was given.
3) Qualified Charitable Distribution
- If you are older than 70 ½ or have a parent or grandparent that is, tell them about a qualified charitable distribution (QCD). A QCD is a direct transfer of funds from your IRA, payable directly to a qualified charity, as described in the QCD provision in the Internal Revenue Code. A QCD from an IRA does not show up as taxable income. If the money was taken out of the IRA, and then gifted, the full amount would be taxable income. Even if a charitable deduction was available, a QCD is almost always more tax efficient. The benefits of this from a tax standpoint can be significant.
- Once a person turns 72, they are required to take money from their IRA annually, this is known as a required minimum distribution (RMD). Amounts distributed as a QCD can be counted toward satisfying your RMD for the year, up to $100,000. The QCD is excluded from your taxable income but can still count for the RMD.
- Although the SECURE Act moved the age for RMD’s back to age 72, you can still use a QCD after age 70 ½.
- Please note that the CARES Act has eliminated the need to take an RMD in 2020, an important consideration as you think about the use of a QCD for satisfying RMDs. You may want to consider delaying your 2020 QCD until 2021 so it can count towards your RMD.
4) $300 Charitable Deduction:
- The CARES Act allows for an additional, “above-the-line” deduction for charitable gifts made in cash of up to $300. If you are not itemizing on your 2020 taxes, you can claim this new deduction.
How you donate to your favorite non-profits matters more now than ever. The TCJA, SECURE Act, and CARES Act has brought a lot of new changes that have significant implications. In the end, giving smartly just means you have more to give.
Feel free to reach out directly to talk more about your specific situation.
Partner, Wealth Advisor
Kerry Meath-Sinkin, CFP®AIF® MPH, is a partner and wealth advisor based in Minneapolis. Kerry combines wealth and wellness strategies to help professionals and their families live more abundant and nourishing lives. She graduated with honors from Brown University and works with clients in the Twin cities and nationwide. Kerry also has a passion for healthy living, is a certified Ayurvedic practitioner, and public health educator. Click here to learn more about Kerry.
This piece is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.
For a comprehensive review of your personal situation, always consult a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.