(This analysis does not include planning for the use of state tax credits for gifts to qualified charities.)
In two recent posts, we suggested two charitable giving strategies which are even more advisable under the new Tax Cuts and Jobs Act (effective January 1, 2018):
-gifting your required minimum distributions (RMD), transferred directly from your IRA trustee/custodian to your church/other charities (as opposed to personally accepting your RMD and then writing a check to charity).
-“bunching” two or more years of charitable giving into one tax year to maximize the tax savings associated with charitable giving in a high standard deduction environment (remember, the new tax law doubles the standard deduction and, as a result, fewer taxpayers have an incentive to itemize their deductions).
We now suggest a third strategy to consider for tax-efficient giving. It involves donating appreciated long-term capital assets to charity (as opposed to giving cash). Commonly-gifted assets under this strategy include stocks, real estate, and bonds. Using stock under an illustration of this technique, assume you bought Acme stock for $1,000 years ago and it is now worth $26,000. If you sold the shares, you would recognize a gain of $25,000 and, thus, pay capital gains taxes on that amount. At a 20% capital gains tax rate, you would write a check to IRS for $5,000 and be left with $21,000 to then donate charitably (and claim as a charitable deduction, if you itemized deductions).
A Better Scenario: If, instead of selling the stock and using the post-tax proceeds to give, you gave the stock directly to your beloved charity, the result is more tax savings for you and more dollars for your charity! Returning to our illustration, gifting the $26,000 in Acme stock would result in a three-tiered bonus: your charitable tax deduction increases from $21,000 to $26,000, the charity receives the full $26,000 (not a reduced amount of $21,000), and no capital gains tax is issued at any point (because the charity itself is allowed to sell the stock without tax liability)! Put another way, you could personally avoid capital gains taxes and enjoy a larger charitable deduction all while bolstering the amount your charity receives.
Gifting appreciated assets to charity, while often overlooked, is a tremendous technique in many regards. Combining this technique with “bunching” can even further elevate the strategy, allowing you to utilize the most powerful way to give charitable in 2018 (and beyond). Happy giving!
NOTE: There are certain limitations on charitable giving such as 30% of adjusted gross income for capital assets and 60% of adjusted gross income for cash donations. Always check with your tax advisor.