You Don’t Need to Be a Millionaire to Take Advantage of These Charitable Giving Strategies
Written By: Brian McKinney, CFP®
MacKenzie Scott, the multi-billionaire ex-wife of Jeff Bezos, has donated billions of dollars to charities and causes with plans to give away much more. She is a philanthropic powerhouse with the means and desire to help other people, and that’s to be admired. With examples in our world like MacKenzie Scott leading the charge, it may be difficult to appreciate how you can make a difference.
The reality is most people don’t have millions or billions to give away. However, they are still charitably inclined and seeking to make a difference by helping others in whatever capacity that they can. Some may not be aware they can accomplish this, while at the very same time, optimizing their own financial situation.
A well-conceived charitable giving strategy can help anyone with philanthropic desires to maximize their means to give, by targeting specific tax breaks offered through the tax code. Here are three strategies that can benefit charitably minded people across all economic tiers.
Qualified Charitable Deductions (QCDs)
For taxpayers aged 70 ½ or older, who no longer itemize deductions due to the expanded standard deduction, the QCD is a significant advantage. It can help lower your taxes by reducing the amount of required minimum distributions (RMDs) that are considered taxable.
QCD’s can be defined as a tax-free funds transfer from your IRA to a qualified charitable organization, in which, you must be at least 70 ½ to use it. To make a donation, you can instruct your IRA custodian to issue a check (with a maximum of up to $100,000 per year) made payable to a qualified charitable organization of your choice.
Donate Appreciated Securities
Another effective method of charitable giving is to donate shares of appreciated stock. Meaning, instead of writing a check to your favorite charity, you can donate shares of stock or other securities such as mutual funds. In practice, you are able to deduct the shares’ market value, which in result, could allow you to avoid capital gains taxes on the stock position that has grown over time. Then, once the charity accepts the donation, they would be able to sell the shares without tax consequences.
For example, if you want to make a $15,000 contribution to the Make a Wish Foundation, you can gift them 100 shares of Apple stock for which you paid $5,000. In this scenario, the shares have appreciated to $15,000 in value, and a tax deduction for the entire $15,000 could be utilized. But if you want to continue to own Apple stock, you can buy the stock at the current price and potentially a higher cost basis. That way, you can take advantage of the deduction and avoid the capital gains tax on your original Apple shares if you had otherwise sold them.
There are a few rules that must be applied to ensure eligibility for the deduction:
- If you donate shares that were purchased less than a year ago, you can only deduct the lessor of the cost basis (i.e., purchase price) or the current fair market value.
- The fair market value of your contribution is based on the average of the high and low prices for the stock the day it’s donated. Mutual fund values are based on the end of day net asset value.
- The IRS limits the deductibility of gifts of appreciated property to 30 percent of your AGI. Amounts that exceed that can be carried forward for up to five years.
Donor-Advised Funds (DAFs)
For people who want to make substantial donations to charity in the future, a donor-advised fund (DAF) is a smart, flexible, and cost-effective way to manage your philanthropic goals.
You can establish a DAF for as little as $5,000 with a custodian. It’s similar to an investment account you open with a financial advisor, except contributions are irreversible. A DAF can act as a storehouse for all your charitable contributions until you decide when and to whom to make a gift. In the meantime, your contributions would accumulate in an investment account. When it comes to taking your tax deduction, you would receive it in the year you make the contribution, if itemizing.
Donating your appreciated stocks can be a great way of funding a DAF. Although, using a DAF offers no advantage, than if you were to donate directly to a charitable cause. With that said, moving your appreciated stock to a DAF would allow the position to be reinvested and diversified for future donations.
DAF is also useful as a tool for charitable “clumping,” a strategy that helps taxpayers take advantage of charitable deductions by pushing their itemized deductions above the expanded standard deduction. See our article, Stack Up Charitable Giving for More Tax Impact, for more information on charitable clumping.
Any of these strategies can be a boost to your philanthropic desires, all the while adding a favorable edge to your personal financial journey. However, because each of these strategies have unique tax implications, it’s advisable to first consult with your tax advisor.