Year-End Planning: How to Make Your Charity Donations Count

At a glance

• The main takeaway: Have you factored charitable donations into your year-end financial planning? If not, there’s still time.
• Impact on taxpayers: Charitable giving is an important part of any financial plan, but it is crucial to ensure you make the right decisions to maximize your donation.
• Next steps: Aprio’s Income Tax and Estate Planning Services team can help you with your year-end financial planning and maximize your charitable donations.

Are you ready to learn more? Schedule a conversation with our team.

The full story:

As we approach the holidays, we are reminded that charitable giving is a rewarding way to support and feel more connected with our communities. Philanthropy is a key component of a financial plan and as our focus shifts to year-end financial planning, charitable donations will look different for each person depending on their financial situation.

In this article, we share ways you can incorporate charitable giving into your year-end financial planning, while also minimizing your tax bill.

Types of Assets to Donate to Charity

Cash

Whether you’re dropping cash into a collection box, sending a check in the mail, or making digital payments online, donating cash is the most common and easiest way to contribute to a charity. If you itemize your deductions, these contributions can be tax deductible. However, it’s important to make sure you’re keeping all the necessary records to substantiate your deduction.

Stocks

If you have appreciated, publicly traded securities in your portfolio, you may want to consider donating stock directly to your charity of choice. By contributing the stock directly instead of selling it first and donating the cash, you will avoid the capital gain tax from the sale, maximize the benefit to the charitable organization, and maximize your tax deduction if you itemize. If you’ve held the stock for more than a year, the amount of your charitable tax deduction is based on the current fair market value of the appreciated stock. The deduction is limited to the purchase price of the stock if you’ve held it short term. This tax savings means that more of the stock’s value is available for the benefit of the charitable organization and the community it serves.

It’s important to note that the charity is likely to sell the stock immediately, so to be useful the stock must be liquid and easy to sell on a public exchange. Privately held or restricted shares, as well as equity in publicly traded partnerships, are not recommended for the purpose of charitable donations.

In addition to its philanthropic and tax-saving benefits, donating stock can help with your investment strategy. If your portfolio is concentrated, a donation of the concentrated stock can help rebalance it. On the other hand, if the appreciated stock is a vital part of your portfolio, you may replace the shares at the current, higher price to reduce future potential capital gains.

If your stock is currently selling lower than the purchase price, you may want to consider selling the stock first, donating the proceeds to charity and taking the capital loss on your income tax return.

Individual Retirement Account (IRA) Distributions

Starting at age 70 ½, you are allowed to donate up to $100,000 per year from your IRA to one or more charitable organizations of your choosing. Such a donation is called a Qualified Charitable Distribution (QCD), also commonly known as an IRA charitable rollover. If your spouse qualifies, they may also donate up to $100,000 from their own IRA in the same tax year. Unlike a donation of cash or stock, there is no need to itemize your deductions to get a tax benefit from this contribution because the amount of the donation is excluded from your gross income.

You can even meet your Required Minimum Distribution (RMD) without increasing your tax burden by using the IRA charitable rollover. At age 73 the RMD rules go into effect, and you must start withdrawing a certain amount of funds from your IRA annually, resulting in an income tax on the amount of the distribution. However, if you don’t need those funds, a QCD from your IRA can count toward your RMD. The result is lower taxable income, which in turn keeps your Medicare premiums down, all while knowing that you are supporting causes which are meaningful to you.

An additional way to consider making a charitable impact with your IRA is to name a charitable organization as a beneficiary of the account. You can continue to withdraw assets as needed during your life, then after your death the charity will be able to use the remaining funds free of tax, unlike an individual beneficiary. The donation could also reduce your federal estate tax by qualifying as a charitable deduction.

Vehicles for Long-term Charitable Planning

Donor Advised Fund

A lesser-known and under-utilized vehicle for charitable giving are Donor Advised Funds (DAF). Essentially a savings account for your charitable giving, DAFs are very accessible, with initial donations typically ranging from $1,000 to $25,000.

A contribution to a DAF is irrevocable and allows you to take the charitable tax deduction immediately (if you itemize) while you retain advisory privileges about how much to distribute, to which organizations and when to donate. Funds contributed to a DAF grow tax-free, increasing the benefit to the charity while minimizing taxes, and allowing you to take a more thoughtful approach and make distributions to nonprofit organizations you choose over time. However, distributions must go to a 501(c)(3) organization recognized by the IRS, and a DAF provider can and may decline to make gifts outside of its boundaries.

A DAF account is opened with an organization who sponsors and manages the account for a small administrative fee. Often these organizations are community foundations, national funds (offered by many financial institutions), or mission-driven funds. You can donate cash, securities, or other assets to a DAF. You may choose to open a DAF account with your current broker, in which case cash and securities from your personal account can easily be transferred to the new DAF account.

Some additional benefits of the DAF include the following:

• Minimizing capital gain taxes by donating assets with unrealized gain, like appreciated stock (as explained above) or a portion of equity compensation.
• No legal requirement to make any distributions on a schedule.
• Option to include family members in decision-making or managing sub-accounts.
• Possible recommendations from your DAF provider to guide your distributions.
• Privacy, as the organization must report its donors but will not disclose how your contributions are directed.

Private Family Foundation

A foundation is a type of charitable organization that you, your family, or company may establish to accomplish your philanthropic goals if you are planning to make a more sizeable impact — an initial, tax-deductible contribution of $5 million to $15 million in assets is recommended to make the substantial administrative costs worthwhile. A foundation is a good way to include your loved ones in your charitable planning and decision making. Family members may also be appointed to board seats or employed by the organization.

A foundation can provide you with greater control and flexibility in how funds can be invested, used, or distributed (including to individuals or foreign organizations in certain circumstances), though there are legal limitations in place. A foundation must distribute 5% of its assets each year or in certain circumstances may set them aside for larger projects. Each gift must be reported on tax Form 990, which is made available to the public and includes the names of the foundation’s directors. The foundation may make investments in for-profit entities which complement its charitable goals, but it may have to pay an excise tax on gains from investments. While there is no limit to how long a foundation may continue, it may be wise to include provisions for terminating the organization at a certain point; future generations may not share your philanthropic priorities.

The bottom line

Charitable giving is an important part of any financial plan and does wonders for your spirit. As you do your year-end planning, please consider the ways you are positioned to make a difference and which priorities are most important to you. Don’t forget to check in with a trusted professional who can help you make decisions and implement your plans.

Aprio’s Income Tax and Estate Planning Services team can help you with your year-end financial planning and maximize your charitable donations.

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