While it’s natural to ponder future changes in the tax landscape, it’s important to focus on the tax planning you can control now, before the year ends. In fact, you can optimize your charitable giving for this year by following these six time-tested strategies:
1. Integrate your year-end portfolio reallocation and your charitable giving.
The fourth quarter of every year often coincides with annual portfolio reallocation, to harvest losses and trim highly appreciated and concentrated positions. Donating appreciated marketable securities (other than publicly traded partnership, or PTP, units*) held for over a year may serve as a tax-free way to reallocate your portfolio as part of your annual investment review.
In other words, between a choice of donating $1,000 of cash or $1,000 of stock that you paid only $200 for many years ago, donating the stock may help you ease out of a highly appreciated position with no gain recognition and also result in an income tax deduction to boot, based on the fair market value of the stock, even if previously purchased at a much lower price.
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As an additional factor, the tax code does impose deduction limits for charitable contributions in general (e.g., 30% of adjusted gross income for donations of long-term appreciated securities to public charities), so donors should consult with their tax adviser on the optimal amount of assets to give.
2. Consolidate your charitable giving through a single vehicle.
As donors support various causes throughout the year, we may commonly do so through separate and individual payments. For keeping track of charitable activity, it often becomes a challenge to keep track of what you’ve given so far, and to which charities, from year to year. In addition, it can take some effort to gather multiple receipts at tax time. For these reasons, many donors pivot to giving through a donor-advised fund (DAF) as a way to streamline their giving.
In a nutshell, a DAF serves as a single tax-free charitable account to support multiple charities. As certain DAF sponsors provide a quick setup process online without requiring a minimum contribution, DAFs have become more popular and accessible as a charitable vehicle, and not just among high-net-worth individuals.
Through a DAF, you can also track your past and recent giving online so you can better navigate the themes and patterns of your giving more deliberately. In addition, since a DAF sponsor constitutes a public charity, you may claim a deduction in the year you donate to a DAF.
Afterward, when you've had some time to review specific charities to support, you may recommend specific grants from the DAF account. Those comparing their standard deduction with the amount they can deduct by itemizing may potentially maximize their tax benefits by “bunching” two years of charitable contributions into one year through a single DAF donation, itemizing deductions for that year and claiming the standard deduction the next year.
3. Plan for ample lead time when donating mutual fund shares.
Depending on the custodian, donating mutual fund shares may require processing times of several weeks, thereby requiring the initiation of the transfer before Thanksgiving.
Also, in general, donors who transfer mutual fund shares after the record date of any associated dividend will still incur tax on the dividend, since they held the stock and rights to any corresponding income as of the record date. If, however, a donor makes a completed gift of the stock prior to the declaration of a dividend, that dividend income inures to the benefit of the charitable recipient.
Therefore, checking the practical deadline with respect to mutual fund share transfers and year-end distributions with your financial adviser(s) would be critical when donating mutual fund shares.
4. Take advantage of employer donation matching opportunities.
According to a recent survey by Chief Executives for Corporate Purpose (CECP), "Matching-gift programs are used by 65% of Fortune 500 companies as a valuable employee engagement tool."
CECP also reported that employer matching has specifically increased for disaster relief: "In 2009, companies dedicated 1% to disaster relief matches. Now, disaster relief accounts for 7% of total matching-gift budgets."
Given the prevalence of donation-matching opportunities in the workplace, it may be worth checking your own employer's policy and, if possible, effectively double your charitable impact through a matching donation.
5. Consider donating vested, long-term employer stock.
Corporate executives often own several tranches of company shares that they received as compensation, and they may benefit from donating the long-term appreciated shares that have already vested. They may wish to diversify out their concentrated position anyway, and donating these shares may also reduce their taxable income as they receive newer shares or units as taxable compensation.
Appreciated employer securities distributed as part of a lump-sum qualified plan distribution may present an additional charitable planning opportunity for those who have retired or otherwise left their employer. The portion subject to ordinary income tax generally equals the cost basis of the distributing trust in the securities. The net unrealized appreciation (NUA) component of the securities distribution equals the difference between the fair market value of the securities at the time of distribution and their cost to the distributing trust.
In contrast to the cost basis portion, NUA constitutes long-term capital gain, which the recipient does not recognize until selling the stock. Instead of selling the stock, the participant could donate it to charity and benefit from a charitable contribution deduction, based on the stock's full fair market value at the time of donation.
6. Fund your philanthropy out of your IRA through a QCD.
Normally, distributions from a traditional IRA are taxable when received. However, through qualified charitable distributions (QCDs), IRA owners who are age 70½ or over can transfer up to $105,000 to charity tax-free in 2024.
For those who are at least 73 years old, QCDs also count toward the IRA owner's required minimum distribution (RMD) for the year.
QCDs remain tax-free as long as they're paid directly from the IRA to an eligible charitable organization (generally an operating public charity, as opposed to a DAF sponsor or private foundation).
As IRS Form 1099-R lacks a special code for a QCD, donors would have to notify their accountant of the charitable contribution to avoid unwarranted taxation on the distribution and also obtain a written acknowledgment from the charity.
The QCD option is available regardless of whether an eligible IRA owner itemizes deductions.
As with every year, donors must have a contemporaneous written acknowledgment from a charity for any single monetary contribution or noncash contribution valued at $250 or more. This documentation is required to claim a charitable deduction on their federal income tax returns.
These last weeks of the year provide a critical window of time to consult with your tax and financial advisers for reviewing which of these strategies to implement now, whatever the future holds for subsequent years.
* For PTP units, e.g., interests in master limited partnerships (MLPs), the charitable contribution amount does not equal the units’ fair market value, even if held for over a year. Instead, the contribution amount decreases by the amount of ordinary income realized if the donor had sold them. Donations of units of PTPs with substantial accumulated depreciation can result in a greatly reduced charitable contribution amount. Additionally, if the partnership carries debt (often the case with MLPs), the donor may incur tax, as the donor is deemed to receive proceeds equal to any amount of underlying debt liabilities attributable to the partnership interest given away, resulting in a transaction characterized as part donation and part sale.
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