With year-end fast approaching, many who seek to support their favorite charities are considering their giving options as well as how to take advantage of wealth planning opportunities.
Here are some gifting strategies and deadlines to keep in mind.
Make a charitable donation to offset the tax costs of converting a traditional IRA to a Roth IRA.
For investors taking advantage of this year’s market downturn and converting all or a portion of their traditional individual retirement arrangement to a Roth IRA, a charitable donation will allow them to support their favorite organizations while offsetting the taxes due on a Roth IRA conversion. The benefit of implementing a Roth conversion in a market downturn is two-fold. First, when values are low, the taxes due on the conversion are generally less. Second, as the market recovers, any increase in value of the assets in the account will be free from income tax when distributed.
People aged 70 1/2 or older can make a qualified charitable distribution from their IRA to support their favorite public charities.
Individuals aged 70 ½ and older can donate up to $100,000 to qualified public charities directly from their traditional IRAs as a qualified charitable distribution (QCD). This action can satisfy charitable goals and allows the funds to be withdrawn from an IRA without income tax consequences. For those at least 72 years old, the distribution will count toward satisfying the required minimum distribution (RMD) for that year and the amount donated is excluded from the account holder’s adjusted gross income for tax purposes even if it exceeds the RMD.
To qualify, a charitable distribution must go directly from the IRA to the intended charity. QCDs cannot be made to donor advised funds, private foundations and supporting organizations.
A gift to a donor advised fund can offset a high-income year.
Gifts to donor advised funds (DAFs) can be a great way to offset income in a year with high earnings, or to address the tax implications of year‐end bonuses or the exercise of stock options. Gifts to DAFs receive the same tax advantages as outright gifts to public charities, with cash gifts receiving the highest deduction up to 60% of adjusted gross income, and gifts of appreciated, publicly traded securities receiving up to 30%.
Individuals on the margin between taking the standard deduction or itemizing deductions could maximize their tax benefits by bundling two years of charitable contributions into one year, itemizing deductions for that year, and then taking the standard deduction the next year.
Gift appreciated assets to a private foundation to offset the tax consequences of rebalancing a portfolio in volatile markets.
Private foundations are widely utilized by wealthy individuals for the level of control they offer donors as well as the opportunity for multigenerational family involvement. For individuals looking to sell assets to rebalance their investment portfolio, gifting appreciated assets to their private foundation (or other charitable entity) will allow them to avoid or offset the capital gains taxes they would incur from the sale of the asset.
The IRS requires private foundations to distribute at least 5% of their market value for charitable purposes each fiscal year, so individuals who use private foundations to achieve their charitable goals should be planning for fiscal year-end distributions if they haven’t done so already. Private foundations can also satisfy the 5% requirement by making distributions to donor advised funds if additional time is needed to decide on the ultimate charitable beneficiaries. The distribution to the DAF is used to temporarily park the funds, which are then granted out from the DAF to the charitable beneficiaries once a decision is made.
Consider the tax implications of donating different types of assets.
Individuals should work with their tax and wealth advisors to determine the best assets to donate, as well as the charitable recipient, based on their specific circumstances. A few points to keep in mind:
- Cash gifts to public charities and donor advised funds provide the highest charitable deduction for lifetime gifts — up to 60% of adjusted gross income.
- Donating appreciated assets offers a tax deduction of up to 30% of adjusted gross income and the opportunity to avoid capital gains taxes at the sale of the asset.
- Volatile markets and market downturns provide unique opportunities to make charitable gifts to offset income and capital gains taxes.
- Certain public charities may not be able to accept complex assets, so gifts to donor advised funds or private foundations may work better in these instances.