With year-end tax planning looming in the next few months, we are bringing you two ideas for donating to charity that could save you additional money at tax time.
The first idea is to donate appreciated stocks or mutual funds from your taxable accounts. Donations of highly appreciated securities actually receive double tax savings. First you get to deduct the full market value of the donation, up to 30% of your adjusted gross income, which can help to reduce your taxable income. Second, the donation of securities also allows you to avoid paying the state and federal capital gains taxes that you would have owed if you had sold the stock.
The second idea is something called a “Qualified Charitable Distribution.” A few years ago, Congress passed a law that allows those who are over 70 ½ years old to give up to $100,000 to charity directly from your Individual Retirement Account (IRA). You may use these qualified charitable distributions (QCDs) to satisfy all or part of your annual required minimum distribution (RMD). Those who give to charity using this method get special tax treatment of their gift.
Typically, taking money out of your IRA is a taxable event – the withdrawal adds to your taxable income and inflates your adjusted gross income (AGI). However, QCDs do not count as taxable income and therefore have no effect on your AGI. This is significant because your AGI determines a number of things, including Medicare premium costs, the net investment income Medicare surtax, the taxability of Social Security income, itemized deduction phase-outs, and exemption phase-outs, to name a few.
So making a qualified charitable distribution allows you to satisfy all or part of your RMD without increasing your taxable income or your adjusted gross income.
With either of these charitable donation and tax-saving strategies, it’s always a best practice to let the organization that you’re making the gift. This way they will know who to send the record of receipt to, so that you will have documentation to hold on to for your tax returns.
As we’ve mentioned before, we are not accountants and therefore suggest that you consult with your accountant to see if either of these ideas would make sense for your particular situation.
Stephen J. Korving, a CERTIFIED FINANCIAL PLANNER™ professional, has nearly two decades of experience in investment research and management. He began his career at Cambridge Associates, where he analyzed and helped advise multi-billion dollar portfolios for wealthy individuals and institutions, developing first-hand knowledge of portfolio construction and implementation that he still uses today.