by David Novak
As we approach the holidays, clients often ask about the best ways to donate to their favorite charities. Approaches can tend to focus on complex entities like remainder trusts or donor-advised funds, which only apply to a small segment of investors. Two simple strategies, however, can be used by just about any investor.
One of the best and easiest ways to give is by donating long-term appreciated securities (such as stocks or mutual funds) directly to charity, rather than selling the assets and donating the cash proceeds. By taking advantage of the applicable tax incentives, you can significantly increase the amount of funds available for charitable giving. There are two key advantages to this method:
Any long-term appreciated securities with unrealized gains (meaning they were purchased more than a year ago, and have a current value greater than their original cost) may be donated to a public charity and a tax deduction can be taken for the full fair market value of the securities — up to 30% of the donor’s adjusted gross income.
Additionally, since the securities are donated rather than sold, capital gains taxes from selling the securities no longer apply. The more appreciation the securities have, the greater the tax savings will be.
Another gifting strategy is using your required minimum distribution (RMD) to make a charitable donation. Last year Congress made permanent the law allowing people 70 ½ or older to transfer their RMD amount (up to $100,000) directly to charity. The donation counts as your required minimum distribution, but doesn’t increase your adjusted gross income, which can be particularly helpful if you don’t itemize and can’t deduct charitable contributions. Also, keeping some or all of your RMD out of your adjusted gross income could help you avoid the Medicare high-income surcharge or help make less of your Social Security benefits taxable.
To be fully tax-free, the money needs to be transferred directly from the IRA to the charity. If you withdraw it from the IRA first and then give it to the charity, you can deduct the gift as a charitable contribution (only if you itemize), but the withdrawal will be included in your adjusted gross income.
Since this is now a permanent law, IRA custodians have made the process much simpler. Many custodians will issue the check directly to the charity, using instructions from the distribution form. Some will even offer check-writing ability from the IRA, which can allow you to write the check directly from your account to the charity, and include any special instructions for the donation.
If your IRA custodian does not offer check writing and instead transfers the money directly to the charity, it is best to contact the charity in advance to give it a heads-up that it will be getting a check from your IRA. This will best ensure that the charity can get your contact information to send you an acknowledgement for your tax records, as well as fulfill any specific instructions you have for the gift.
David Novak, CFP® is a Certified Financial PlannerTM at Novak & Powell Financial Services in Pinellas County. Please note: he is not an attorney and this article should not be construed as one offering legal advice. For information about investment decisions and financial planning, email him at email@example.com.