The holiday season is a few short weeks away and now is the time for Middle Class Millionaires to begin thinking about their charitable giving for the year. Armed with a few simple strategies, you can give more regardless of the status of the financial markets. Of course, the main reason for your charitable giving should be a genuine desire to make a positive difference in your community. But first, you must decide where to direct your charitable contributions.
Charitable Gifting Basics
Since the equity markets have rallied over the past five years, many individuals have unrealized capital gains on stocks and other securities. Some of these securities may be over weighted in your investment portfolios, so you should reduce their position in order to maintain the proper asset allocation. We would either sell those securities and you pay tax on the capital gains, or you could gift the shares and receive a tax deduction on the full fair market value.
There are also tax-related gifting strategies for stocks with unrealized losses. Let’s say you bought $5,000 worth of stock in ABC Corporation, and the value went down to $2,000. The stock is sold and the $2,000 in cash is donated to a charitable cause. The investor takes a $3,000 loss on his or her tax return, and at the same time receives a $2,000 tax deduction for the donation – a total tax advantage of $5,000.
Finding Reputable Charities
How do you know to which charity you would like to donate? My advice is to give to organizations you care about, preferably ones with which you are involved. If you would like to research a charitable organization, check out Charity Navigator (www.charitynavigator.org) to search by categories nationwide or find a specific organization in your community. Another similar website is Guidestar (www.guidestar.org) which is also free, but they offer several subscription packages if you are interested in drilling down to employee and board member information.
Making It Easy to Gift Securities
A donor-advised fund is a type of fund you set up to receive stock or mutual fund donations and then convert them into cash. It allows you to receive an immediate tax deduction on a lump sum stock contribution and then take your time deciding how to spend that money by issuing checks to your favorite charities, similar to an on-line bill paying account. Any money not donated stays in the account which is invested in an index portfolio and can grow tax-free. We have clients who enjoy making the donation decisions together from year to year and the fund can live on from generation to generation.
You may also have a particular stock which has doubled or tripled in value. We would identify that as “Gifting stock” and recommend giving that directly to an organization or an individual. In this case, consider two things – 1) how much will the recipient have to pay to liquidate the asset? 2) Is the recipient in a lower tax bracket than you?
Many churches or small non-profits have a standard brokerage account and are charged hundreds of dollars to sell a stock. They may be better off receiving a cash donation from a Donor Advised Fund. If you’re planning to give money to a family member say a young adult, they could sell the appreciated stock (which carries your cost basis) but pay 0% capital gains tax if they’re in the 10-15% marginal tax brackets. However, if your heirs are in similar tax brackets as you, they’re better off receiving cash now and the appreciated stocks after your death, when they can receive the step-up in cost basis.
Our closing piece of advice is this: whether a particular asset has gained or lost value, by giving smartly you will save considerable taxes while enjoying the feeling of helping others and maximizing benefits all around. It’s like grocery shopping with coupons or buying a TV on Cyber Monday– dollars saved on taxes are dollars earned for your community or family.