“Charitable giving” is a broad term that covers many things, such as volunteering your time, giving blood, or writing a check to your favorite charity. This article will focus on two lesser-known charitable giving opportunities: appreciated asset donation and Qualified Charitable Distributions from an Individual Retirement Account.
Many clients choose to give to charities by donating appreciated stock. Donating stock can be as simple as writing a Letter of Authorization (LOA) to your current broker-dealer/custodian asking to transfer the stock to your chosen charity. The signed and dated LOA should include your contact information, account number, and detailed description of how many shares you would like to give Most custodians require the LOA to be notarized, or medallion signature guaranteed.
Most commonly, the charity sells the gift immediately and uses the proceeds to further their mission. The charity or cause is especially pleased as these donations tend to be a greater amount than other types of contributions, i.e. check or cash.
By donating appreciated stock, you may receive several benefits. The most obvious is the pride you get from helping those in your community! In addition, there may be potential tax benefits for the individual donating the assets. Typically, the tax deduction is equal to the current market value of the donated asset. If you choose to sell the stock, then donate the proceeds, you would potentially be responsible for capital gains tax on the stock’s appreciation.
Here is an example: Imagine Mary and Tom purchased 200 shares of XYZ Corporation at $20 per share (200 X $20 = $4,000) a few years ago. Today the shares trade for $47 per share (200 X $47 = $9,400). If they choose to sell the stock, they would pay long term capital gains on the difference between the sell price and the purchase price ($9,400-$4,000 = $5,400 in capital gains). A portion of the gains could be used to pay the capital gains tax; the rest would then go to the charity. However, if they decide to donate the stock, Mary and Tom would pay no capital gains tax while getting a tax deduction for the full amount of the gift ($9,400).
Another gifting option is a Qualified Charitable Distribution (QCD). A QCD allows an IRA owner, subject to Required Minimum Distributions (RMD), to direct their RMD to a 501(c)(3) organization, eligible to receive tax-deductible contributions. There are limits and restrictions on how and when you can do this. You must be 70 ½ or older. The maximum amount that can qualify for a QCD is $100,000. The funds must come out of your IRA by the RMD deadline, generally December 31st. Also, in order for the QCD to qualify the distribution check must be made payable to the charity. You cannot receive the funds, then write a personal check to the charity.
Here’s an example of QCD at work: Mary and Tom, the charitably minded couple who donated stock in the previous example, would like to give cash to their favorite 501(c)(3) charity. They can either write a check with after-tax funds or direct their IRA custodian to mail an RMD check payable to the charity. There are several benefits of a direct RMD QCD contribution. One benefit is that Mary and Tom can give more to the charity because they use before tax money. Another is that the QCD is not included in their gross income, thereby not increasing their Adjusted Gross Income (AGI). Mary and Tom are well aware that an artificially inflated AGI may create a phase out of both personal exemptions and itemized deductions on their tax returns. Also, since they receive Social Security benefits, a higher AGI could lead to more of their Social Security benefits being taxed.
In conclusion, there are many options investors have to support their favorite charity. Careful consideration of your financial situation is imperative to ensure you are making the best charitable gifting decision.
As always, it is wise to consult your financial and tax advisors before making any decisions.
Greenwood Capital is an SEC registered investment advisory firm. This material has been prepared for information purposes only, and is not intended to provide, and should not be relied on solely for tax, legal or accounting advice.