View from the Front Office – Charitable Giving

This is the time of year when we work with our clients on year-end tax planning. We review their realized gains and losses for the year as part of their entire financial situation. We consider their income tax bracket, the realized gains and losses they may have with other accounts, their itemized deductions, etc.

A client asked about charitable donations and income tax deductibility. I did some digging and learned some things I hadn’t known that I think are worth sharing. But before I do, disclosure time:

I AM NOT A TAX ACCOUNTANT, ATTORNEY, OR EXPERT. THE FOLLOWING DOES NOT CONSTITUTE TAX ADVICE AND YOU SHOULD DISCUSS THESE IDEAS WITH YOUR OWN TAX ADVISOR. THE FOLLOWING ARE GENERAL THOUGHTS AND OBSERVATIONS AND MAY OR MAY NOT APPLY TO YOUR INDIVIDUAL AND SPECIFIC SITUATION.

Before starting, make sure you answer the following questions:

1. Why donate to charity? Are you trying to:

a. reduce your income tax

b. reduce your taxable estate?

c. contribute to a good cause?

d. teach your children about philanthropy?

e. accomplish all of the above and something else besides?

2. What is your current income tax bracket, and do you itemize income tax deductions?

All of which lead to the ultimate question of:

3. How much do you want to donate to charity this year?

So, let us take a look at item #1a. If you want to donate to charity, and it makes sense to itemize deductions; then the following information becomes useful (and possibly even interesting.)

1. There is no limit to the amount you can donate to charity.

2. There is a limit to how much of your donation you can itemize as deductions on your income tax return.

a. Cash gifts are deductible up to 60% of your Adjusted Gross Income (AGI) for the year.

b. Gifts of appreciated assets (including stocks, bonds, mutual funds, etc.) are deductible up to 30% of AGI.

c. Excess donations can be carried over to future income tax returns as deductible items for up to five years.

3. S Corp and Individuals are treated the same for tax deduction eligibility since the S Corp is a pass-through entity.

4. Qualified Charitable Donations (QCD) from an IRA are:

a. available to people age 70 ½ or older.

b. limited to $100,000 per year.

c. not added to your AGI.

d. not deducted from your AGI.

5. Donor Advised Funds (DAFs) are eligible to receive donations of cash and appreciated stock with the same deductibility limits as above but ARE NOT eligible to receive QCDs.

6. Sales of Appreciated Stock are NOT subject to wash sale rules.

7. Donations to the United States Department of the Treasury ARE tax deductible, and you can specify whether the donation is to reduce the public debt or for general expenses. It’s not what I consider a charity, but the option exists, and few people seem to know about it (and even fewer people take advantage of it for some reason.)

With all of this in mind, I’ve developed some rules of thumb regarding charitable donations:

1. If you want to donate 30% or less of your AGI, then donate low-basis appreciated stock to get the current income tax deduction and avoid paying capital gains tax now or in the future.

2. If you want to donate more than 30% but less than 60% of your AGI, then donate cash. If you need to sell stock to raise the cash, then sell stocks showing losses and high-basis appreciated stock. You can use losses to offset some of the capital gains, and the capital gains tax will not cost more than you will save on the income tax deduction. Plan ahead if you choose to take losses on stocks that you want to continue owning to avoid violating the wash sale rule. Do not let the tax tail wag the investment dog.

3. If you want to donate more than 60% of your AGI, donate the first 60% of AGI in cash as described in #2 above and donate the balance in shares of low-basis stock as described in #1 above.

4. Use QCDs when available.

The upshot is that making charitable donations can help manage your AGI and the federal income taxes you pay. These rules of thumb may change as tax laws change, but they are a good checklist to consult even then.

Once again, I AM NOT A TAX ACCOUNTANT, ATTORNEY, OR EXPERT. THE PRECEDING DOES NOT CONSTITUTE TAX ADVICE AND YOU SHOULD DISCUSS THESE IDEAS WITH YOUR OWN TAX ADVISOR. THESE ARE GENERAL THOUGHTS AND OBSERVATIONS AND MAY OR MAY NOT APPLY TO YOUR INDIVIDUAL AND SPECIFIC SITUATION.

But by all means, give me a call if you have questions or want to walk through some scenarios together.

The comments made in this article are opinions and are not intended to be a forecast of future events, a guarantee of future results, nor investment advice.

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