It is officially giving season. In December, people start writing checks to their favorite charities, participating in local toy drives, or at the very least, throwing some change into Salvation Army buckets. The holidays just seem to bring out a giving spirit.
And helping others should always remain the objective, but even the most charitable of givers can tailor their contributions to provide the best tax and financial result. So when you give this holiday season (and you should give), keep these strategies in mind.
Gift Appreciated Stock
Most charities are set up to receive stock transfers, and with the Dow up over 10% this year, it may be an especially wise choice for 2016. Why give appreciated stock instead of cash? You are not taxed on the gain and you still get credit for the fair market value on the date of the gift. It’s the best of worlds.
For example, say you own $10,000 of Alphabet (formerly Google) stock that you bought two years ago for $7,000. If you sell it and contribute the cash, you get credit for the $10,000 charitable contribution but you will owe around $600 in taxes. On the other hand, if you just make a stock transfer, you get credit for the full $10,000 contribution but owe no capital gain tax.
Use Donor Advised Funds
I wrote a whole blog post about the advantages of using donor advised funds (DAFs) early in November, but it’s worth reiterating here. DAFs allow you to make contributions that are currently deductible to an account that you can invest for tax-free growth and distribute to charitable organizations in the future.
This type of strategy has been available in the form of private foundations for a while, but the recent popularity of DAFs provides a less expensive and more administratively manageable alternative for charitable planning. Especially for taxpayers with fluctuating income levels, you can make larger DAF contributions to offset high-income years and decide where to give later.
Qualified Charitable Distributions
The IRS will not allow you to keep your retirement account flush indefinitely. When you reach age 70 ½, you must begin taking required minimum distributions (RMDs), which are annual withdrawals based on the account balance and IRS tables estimating the number of years you have left to live. But the IRS will allow you to satisfy the RMD requirement by making a qualified charitable distribution (QCD).
If you make a QCD, the distribution is completely ignored for income tax purposes—there is no charitable deduction but the withdrawal is never counted as income, which is even better. There are several minor requirements when making this type of contribution, but it can be an extremely advantageous strategy for wealthy clients who don’t need to tap their IRA.
Don’t give for tax reasons because that doesn’t make any sense—you’re paying a dollar to save fifty cents. Give to organizations worth supporting, but when you do give, make sure you are taking every tax advantage you can get.
Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.