Two weeks ago, my colleague, Christina Mangino, wrote about Qualified Charitable Distributions as a tax effective strategy to avoid recognizing the income and resulting taxes from a Required Minimum Distribution by sending the distribution directly to a charity. You can read more about a Qualified Charitable Distribution in her article. Today, I want to share another tax effective strategy for donating which is available for charitable individuals of all ages (not just over the age 70 ½), and that strategy involves gifting highly appreciated securities to charity instead of cash.
If you are charitably inclined AND you own securities with significant long-term capital gains, then you may want to consider gifting those appreciated securities instead of cash. The premise of this strategy, like the Qualified Charitable Distributions, is predicated upon your desire to want to give to charity in the first place. The benefit of donating appreciated securities is that you can avoid paying capital gains taxes that would have otherwise been owed in the future, unless you know you will hold the securities for the rest of your life. The elimination of pending capital gains taxes exists whether you claim the standard deduction or itemize, but if you do itemize, you may also benefit from the deduction.
It is worth noting that the recent tax reform increased the standard deduction to $12,000 if you are single and $24,000 if you are married, filing a joint return. When you combine the higher standard deduction with the $10,000 cap on the state and local income or property taxes paid, many more returns are expected to claim the standard deduction because families will simply not have enough deductions to warrant itemizing. Further, you can only deduct charitable contributions if you itemize, so if you claim the standard deduction, you will not be able to deduct any charitable contributions. This means many charitably inclined families are expected to forego the tax deduction for their donations because they will claim the standard deduction. Although I recognize that our charitable intent did not originate from the tax savings in the first place, it was an added benefit to giving that is lost for those claiming the standard deduction.
Given these changes, I thought it was a good time for a reminder that there are still ways to mitigate your current or future taxes and as always, I recommend you consult with your tax advisor to see what makes sense in your unique financial situation. Just remember that if your charity is set up to receive them, donating appreciated securities held on a long-term basis is going to be preferential to writing a check.
– Haddy Homampour, Financial Planning Strategist