Best Charitable Giving Strategy for Your Unique Situation

November 23, 2018by Brian Fry CFP®

Not only can charitable giving be gratifying to give back to personal causes, it can also be a way to minimize downside risk within a portfolio and limit taxes. The Tax Cut Jobs Act of 2017 changed the landscape for taxes by nearly doubling the standard deduction and hurting the impact of itemizing deductions through charitable giving. With the new tax code in place, there are still ways to give back and find the best tax strategy for your situation. No matter if you’re in Los Angeles or anywhere in the US, what is the most efficient way to give back?

Best Charitable Giving Strategy

Gifting Directly From a Taxable Account

While the new tax code may have limited the ability to itemize deductions, there are many benefits investors receive by gifting securities directly from a taxable account to a charitable organization. Several organizations have an investment account at a brokerage and will accept gifted appreciated securities. When the gift is made, the charitable organization is able to sell the security immediately without recognizing gains. This gift makes the same impact to the organization as cash without recognizing a capital gain.

Example: You have $15,000 of a stock that you bought in 2000 for $5,000 are are in the 32% federal tax bracket. You want to make a $15,000 gift to a charitable organization. If you gift the security directly to the charitable organization, you are able to give $15,000 without recognizing capital gains. If you sold the security, you would recognize $10,000 in long-term capital gains which could create approximately $1,500 in additional taxes.

Gifting From a Donor-Advised Fund

A donor-advised fund is a charitable investment account for supporting charitable organizations of your choice. When you gift to a donor-advised fund, you are generally eligible to take an immediate tax deduction. There may be a potential tax benefit to bunching years of giving into a donor-advised fund if a household has the ability and desire. Donor-advised funds can take appreciated securities and cash contributions. Once within a donor-advised fund, funds can be invested for tax-free growth and can be gifted to any IRS-qualified charitable organization. This can be more efficient than gifting directly from a taxable account. The downside of choosing a donor-advised fund is their are percentage of assets costs for managing a donor-advised fund, limitations for investment options and minimum account balances associated with opening account.

Gifting From an IRA

With the Protecting Americans from Tax Hikes (PATH) Act of 2015, qualified charitable distributions were made a permanent part of the tax code. Qualified charitable distributions represent the action of giving directly from an IRA and other eligible tax-deferred accounts directly to charitable organizations as part of your Required Minimum Distribution (RMD). While the tax benefits of can be potentially great, there are several limitations.

  • You must be 70.5 years or older to be eligible to make a qualified charitable distribution
  • Qualified charitable distributions are limited to the amount that would otherwise be taxed as ordinary income.
  • The maximum annual amount that can qualify for a qualified charitable distribution is $100,000. This number can be greater than your RMD.

Which Charitable Giving Strategy is Best?

“Best” strategies are case-by-case and these three strategies are the most common I run into with my financial planning practice. Generally, I recommend gifting from a donor-advised fund as the most efficient way to gift to a charitable organization. Costs are minimal and tax-free growth can make a major impact to the charitable organizations that are important to you.

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by Brian Fry CFP®

Safe Landing Financial is a Los Angeles, CA fee-only financial advisor providing financial planning, retirement planning and investment management to tech professionals and pre-retirees. When you work with Safe Landing Financial, you work with Brian Fry, a fiduciary and CERTIFIED FINANCIAL PLANNER™ that puts clients’ best interests first. Financial planning services include: retirement planning, charitable giving, asset protection, estate planning, saving for college, debt management, tax strategy and investment management. Safe Landing Financial serves as a virtual fee-only financial advisor to individuals and families nationwide.