The end of the year is a time when our thoughts turn to giving—both for altruistic reasons and tax reasons. But while the intention to do well by doing good is laudable, it must be carefully executed so that our gifts are as meaningful and tax-efficient as possible. Here are a few points to bear in mind.
Cash or stock?
If your first impulse is to write a check to your favorite charity, you may want to reconsider. Appreciated, publicly held stock is often a more tax-efficient gift. As long as you give publicly traded securities held for more than a year, you are typically allowed a full fair-market-value deduction for the securities. You can deduct up to 30% of adjusted gross income if you donate to a public charity and up to 20% if you donate to a private foundation. You also avoid the tax you would have accrued in any future sale.
The tax devil is in the details. If you wish to deduct a gift of $250 or more, you’ll need to obtain a written acknowledgement from the recipient. That acknowledgement must be received by the date you file your return or the deadline for the return, whichever is earlier. Keep in mind that this requirement applies to family foundations as well. Even if you make a gift to a family foundation that you created, acknowledgement is required for the gift to be tax-deductible.
IRA assets for charity.
IRA assets left to family can be a mixed blessing because they are subject to significant estate and income tax. It may be better to leave more lightly-taxed assets to family and tax-burdened ones like IRAs to a charity. You can leave any amount of your IRA to charity, and the total is free from both income and estate tax.
Your non-IRA assets, meanwhile, can be “stepped up” to fair market value when transferred to your heirs upon your death. Thus, your heirs will only owe capital gains on future appreciation.
Appraising donated property.
Gifts of property worth more than $5,000 (or $10,000 for closely-held stock) must be professionally appraised no earlier than 60 days before the transfer. Failing to meet that and other specific requirements can jeopardize the entire deduction. This requirement does not apply to publicly traded stock.
Take the easy money.
If you’re helping pay for your kids’ education, don’t overlook educational tax credits. The American opportunity credit is worth up to $2,500 per student, and the lifetime learning credit can net you up to $2,000 per return, depending on your income and other factors.
Run the numbers.
The federal tax code is a gauntlet of complex rules, so it’s advisable to calculate your tax savings based on all the pertinent variables. Those include:
- The kind of asset to be gifted
- Your tax rate
- Other donations made in the same tax year
- Whether you fall under the alternative minimum tax
End-of-year giving is a boon to charities, and you should be confident that you’re getting the most out of it as well. If you would like help reviewing the tax-efficiency of your philanthropic gifts, we may be able to help. That’s just part of what we do.