With year-end rapidly approaching, charities have begun filling donors’ mailboxes and inboxes, reminding them of unpaid pledges or asking for additional support. Before reaching for your checkbook or hitting that “support” button on an email, consider these tax-efficient ways to support charities.
- Gift of highly appreciated assets: By donating assets whose value is higher today than when you originally bought them, and were held for more than one year, you are able to avoid paying capital gains tax on these assets.
Example: Let’s say that shares of a certain fruit-themed technology company you originally acquired several years ago for $1,000 are now worth $10,000, thus $9,000 is the long-term gain. You would like to make a gift to your church or charity of choice. Your options include:
- Sell the shares and write a check equal to your after-tax proceeds. Ignoring state income taxes and assuming you are at the highest federal income tax rate bracket of 39.6%, you’ll pay federal capital gains tax on the $9,000 in realized gains. This is the 20% federal capital gains rate + 3.8% Medicare tax on “unearned” net investment income, or $2,142. Writing a check for the after-tax proceeds leads to a gift of $7,858 to your charity (and a tax bill to Uncle Sam for $2,142).
- Gift the shares directly to your charity. This avoids realizing any capital gains and thus the associated tax bill, which means your charity of choice receives the full $10,000, and you are not taxed. The charity would then sell the shares once received, and given their non-profit status, would not be taxed either. The charity gets more and you avoid paying taxes on these gains—a win-win!
- IRA Charitable Rollover: In December 2015, Congress made permanent the ability to make charitable gifts directly from your Individual Retirement Account (IRA), without treating the distribution as taxable income (note that this is specific to federal taxation only, so you may be subject to state income tax). You must be older than 70 ½ to be eligible to direct up to $100,000 of your Required Minimum Distribution (RMD) and gifts must be made to a public charity—donor-advised funds are not eligible. While you are not able to take a tax deduction on these gifts, the ability to avoid taxable income, especially if it keeps you from moving into a higher tax bracket, usually is more favorable than any tax deduction. This blog post goes into more detail about IRA Charitable Rollovers.
A hallmark of the Balentine legacy for nearly 30 years has been an emphasis on community service, and we want our clients’ hard-earned dollars to make the most meaningful impact possible in the organizations about which you are most passionate. Part of this includes finding the most tax-efficient avenues for gifting. As year-end approaches, please speak with your Relationship Manager to determine the most appropriate strategy to maximize the impact of your philanthropic support.