If you’re charitably inclined, like many of our clients are, here are a few tips to help maximize your donations so that every dollar goes further for you personally and also for the causes you support.
Are you or is someone you know over 70 ½ years old?
If you are 70 ½ years old or older, you probably have retirement savings in an IRA or an old employer plan (i.e. 401(k), pension, 403(b), 401(a), 457, etc.). The year after you turn 70 ½ years old, you’re required by law to start taking distributions from those accounts. These are called Required Minimum Distributions (RMDs), and when these distributions come out of the account you pay taxes on them. For people who have other resources (i.e. pensions, Social Security, Roth IRAs, brokerage accounts, etc.) they might not need to take these required distributions to meet their needs. For those people, they may consider making Qualified Charitable Distributions (QCDs), whereby you direct a portion of your required distribution to be made payable to a charity. The distributions are made directly from your retirement account to the charity thereby eliminating the income recognition from your tax return.
- Benefits to the Charity: The charity receives a donation for the full amount of the distribution, without it being reduced by any taxes you would’ve had to pay on it.
- Benefits to You: You can reduce your taxable income by an amount equal to the full donation amount. You’re able to make a larger donation than before because you’re now gifting pre-tax dollars. This tax benefit was not limited or impacted by the recent tax changes of 2018.
Do you own shares of company stock?
Perhaps you’re one of those lucky people who bought shares of Apple, Facebook, Google, or Amazon before these companies took off. Maybe you purchased shares of company stock from your employer. Whatever the case, if you own individual shares of company stock and they have increased significantly in value, you’re probably holding onto it because you don’t want to sell it and realize a ton of taxable gains. One option you have is to gift that stock directly to charity.
- Benefits to the Charity: As a tax-exempt organization, the charity can sell those shares without realizing any taxable gains and can utilize the full value of the stock to help further their mission.
- Benefits to You: You avoid having to pay taxes on any gains for those shares donated and can report a donation equal to the current market value of those shares on your tax returns. The actual tax deduction for this year will be limited to 30% of your Adjusted Gross Income (AGI), but you can carry forward any remaining deductions over the next 5 years.
Are your taxes are going to be high in 2019
If you’re working with your accountant and project that this year is going to be high tax year, you might be able to utilize your charitable donations to reduce the tax burden. You can contribute company stock (continuing from our last example), fund shares, or a specific dollar amount to a Donor-Advised Fund. Then you can request distributions from the fund to be made directly to charity whenever you want.
- Benefits to the Charity: Your donations can go much further, because the Donor-Advised Fund manager can trade and invest your contributions without tax consequences. Your contribution grows tax free and is received tax-free when disbursed to a charity.
- Benefits to You: You can take an upfront tax deduction for the full market value of your contribution to the Donor-Advised Fund in the year that it is made, even though your contribution might remain invested in the fund and you have full control over when any disbursements are made to charity in the future.