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Maximize Your Charitable-Giving Deduction: Strategies for 2019

Maximize Your Charitable-Giving Deduction: Strategies for 2019

| April 04, 2019
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Tax Minimization Napa Valley, California. Kelly Crane, Wealth Management.
With the significant increase in standard deductions in the 2018 tax reform, many donors are grappling with the most efficient strategy to support their favorite charity and simultaneously lower their tax bill. No doubt, you’ll need to be proactive in your approach. Consider these charitable giving strategies to help plan your giving strategy and timing in 2019 and beyond (or at least until the next massive tax reform).

Assuming you intend to give this year, following are three strategies that could help maximize your donations in 2019.

Give Stocks, Not Cash

This year, giving stocks—in lieu of cash—to your favorite charity may be more strategic.

Donating an asset that has increased in value since you bought it can multiply your giving and your tax deduction. Think bigger donation and write-off and no taxes on the gains. In an environment like today’s all-time-high stock market, chances are you have an appreciated asset.

When you donate an asset (stocks, art, etc.) that has grown in value since you purchased it, you get three primary benefits:

  1. Deduct the asset’s current value, which, of course, is higher than what you invested out of pocket.

  2. Avoid tax on the gains—up to 40+%! Currently, investment gains incur the Federal capital gains tax (generally 15 or 20% for those with more than minimal income), the Obamacare net investment tax (3.8%), for some high-income taxpayers the alternative minimum tax (AMT) (4-5%), and any state income tax on the appreciation. If you’re lucky enough to live in California, your spoils are taxed at the highest marginal tax rate in the nation: up to 13.3%. By donating the asset, you avoid all of these.
  3. Keep money in your pocket and give non-liquid funds. One of the best parts of donating an appreciated asset is that it doesn’t deplete your current available resources.

The key to donating stocks is to transfer them directly to the charity. If you sell them first, you’ll trigger all the taxes mentioned above and reduce the net amount the charity receives.

Here’s an example.

Say you purchased $2,500 of XYZ stock in 2010, and those shares are now valued at $7,000.

  • If you transfer the shares to your favorite charity, you’ll have a $7,000 charitable deduction—for shares that only cost you $2,500.
  • If you sell the shares first and then donate, you’ll trigger all the applicable taxes (without ATM, for the top 37% rate, that’s $2,597) and the charity will only receive $4,403.

You can donate only part of the shares in which you’ve earned a gain, but you can't sell any shares until you have completed the gift to the nonprofit.

How to donate: The charity should have a brokerage account to receive the donated asset. If not, they may have an arrangement with a community foundation. Your broker will process the paperwork to initiate the transfer. This can take a few days to several weeks, depending on how fast the paperwork clears, so you’ll want to start your transfer by November 1.

Multiply your giving, and minimize your taxes.

Donate Your IRA’s Required Minimum Distribution

An opportunity that started after Hurricane Katrina took root and was made permanent by Congress a few years ago. For those 70½ or older, you may can donate your required minimum distribution (RMD) from your tax-deferred retirement account to charity without triggering any taxes.

These donations become known as qualified charitable distributions (QCDs). To qualify, the funds must transfer from an IRA custodian to a qualified charity. Certain charities are not eligible to receive QCDs, including donor-advised funds, private foundations, and supporting organizations.

The primary benefit of donating your RMD to charity is avoiding the extra income tax triggered by the distribution. If you don’t need the income, then you can effectively bypass the RMD and its tax consequences by donating it, up to $100,000.

How to donate: As with stocks, these funds must be transferred directly from your IRA custodian to the qualified charity. Your IRA custodian can issue a check from your IRA payable to the charity, which you can request to be mailed to the charity or forward to the charity yourself.

Deduct Now, Decide Where to Give Later

If you’re not sure where to give, but need to donate this year for the deduction, consider donor-advised funds (DAF) and community foundations. Both allow you to give now and decide later where to direct your donation.

Donor Advised Funds

A donor-advised fund (DAF) is a charitable fund set up at a nonprofit in your name. Once established, you make charitable contributions into the fund, receive an immediate tax benefit, and then recommend grants from the fund to your favorite qualified charities over time. You can donate into the account as often as you like. After the 2018 tax law changes, bunching your donations every other year may be a viable strategy, and a DAF can help you still give regularly to your favorite charity throughout the year, while maximizing your itemized deductions.

Donor-advised funds have serious charitable-giving potential. Monies left in your DAF are invested, based upon your preferences, so they have the potential to grow, tax-free, while you’re deciding which charities to fund.

In addition to cash, you can donate stocks, appreciated assets, and non-publicly traded assets such as real estate or private company stock to your DAF. Your charitable deduction is the value of the asset at the time you transfer it. Because you get an immediate deduction, your contributions are irrevocable.

Typically, you will pay an administrative fee and any investment fees for the administration of the account, so be sure to check with the nonprofit for their rates.

How to donate: You’ll need to look for a public charity that sponsors donor-advised funds (many community foundations and charitable arms of investment firms do).

Community Foundations

Community foundations are grantmaking public charities set up in your community that support local causes in a geographically defined area (such as the Napa Valley Community Foundation or the East Bay Community Foundation). You donate assets to the foundation, and they allocate your donation to various organizations which they deem meet the goals of the foundation. Often these foundations are quick to fund front-line charities responding to immediate local needs, such as natural disasters. If you’re not sure where to give, but want to support your local community, community foundations are a great place to start.

As well, if you’re looking for a charity to give to, feel welcome to peruse the list of local charities we regularly support. 

How We Can Help

As CERTIFIED FINANCIAL PLANNERSTM, our team can help you analyze charitable-gift options that can help maximize your giving and your deduction. Contact us for a brief phone call or meeting to discuss your charitable giving goals. Together, let's power your giving this year.

Related Article: 11 Elements of an Effective Tax Savings Plan

Related Article: How to Lower Your Taxes: Take a Hard Look at Your Investments

Related Article: Charitable Giving Strategies to Maximize Your Deductions

Related Article: Charitable Giving Choices

Categories: Tax Planning, Tax Strategies, Tax Management, Tax Minimization, Charitable Giving Strategies

Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Napa Valley Wealth Management, a registered investment advisor and separate entity from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

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