The holidays are right around the corner and this means many of us are getting into the gifting spirit. Whether with time, money, or possessions there are different kinds of gifting strategies. In this blog, I will explain three along with their tax implications.
Gifting Shares of Stock
Strategy #1 is gifting appreciated shares of stock. Say you have an individual or joint investment account. You own shares in a company that have gone up in value significantly. Rather than liquidating these stocks and paying capital gains tax, you can gift those shares to charity. In doing this, you will avoid paying capital gains tax and can write off the full value of the funds. This is a good strategy if you have shares of a stock held in an after-tax account.
Qualified Charitable Distributions (QCDs)
Strategy #2 deals with QCDs. If you are at least 70 1/2 years old and have a traditional IRA you are eligible to donate up to $100k directly from your IRA to a charity. You will not have to pay income tax on this distribution. This is useful if you are subject to RMDs. You can choose to take either part or all of that Required Minimum Distribution out and donate it to a charity via a QCD, which lowers your taxable income.
Donor Advised Funds
Strategy #3 is to bunch giving using donor-advised funds. When you contribute to this type of fund you can claim a tax deduction in the immediate year but do not have to decide which charities the money goes to until later. These funds are great if you are looking for a tax deduction in the current year. This strategy is particularly great if you are in a high-earning or high-income year.
Please note: If you contribute to this type of fund, the money must be donated to charity eventually.
Things to Keep in Mind:
Standard Deduction vs. Itemized Deduction
You must itemize on your tax return to claim the full tax benefits of charitable giving. If your itemized deductions, including the charitable donation, are not greater than the standard deduction, it may not make sense to itemize and therefore would not get the deduction for the charitable donation.
Giving Restrictions
There are restrictions on how much you can deduct based on your Adjusted Growth Income or AGI. For cash donations, your deduction is limited to 60% of your AGI. To gift stock, you are typically restricted to 30% of your AGI.
Timing Matters
If you are in a high-earning year, strategies like bunching through a donor-advised fund make sense but if you are in a low-income year it might make more sense to spread out your donations.
Charitable giving feels good for a myriad of reasons. It does not hurt that it can benefit your tax strategy as well. If you are interested in learning more about gifting, I would love to speak with you.
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