Year-end is at hand. With year-end comes year-end tax planning, including your last chance to make a charitable donation and claim a tax deduction for the 2016 tax year. Here are a few ways of giving that go beyond simply giving cash for your year-end charitable donations.
Direct IRA Distributions to Qualified Charities
Do you have a large balance in an IRA? Still haven’t met your minimum distribution requirement for the year? Don’t need the additional income? If you or your spouse are 70 ½ years of age or older, consider making a gift of up-to $100,000 directly from your IRA account to a qualifying charity. A direct distribution from an IRA account to a qualified charity of your choosing has a couple of tax benefits over other types of charitable donations:
- First, the distribution counts toward your minimum IRA required distribution amount, even though it is excluded from your gross income.
- Second, exclusion of the direct charitable distribution from your gross income means your adjusted gross income (“AGI”) will be lower than it otherwise would be. This has an additional, beneficial tax benefit for some taxpayers.
If you itemize your income tax deductions, your AGI may have a direct impact on the value of those deductions. Your itemized deductions are subject to limitation based upon the value of your AGI. So an IRA distribution to charity that is excluded from your AGI may increase your allowable itemized deductions. Just two examples: medical expenses are deductible from your taxable income only by the amount these expenses exceed ten percent of your AGI, and allowable itemized deductions , such as the deductions for state and local taxes and mortgage interest paid during the tax year, are reduced for certain taxpayers if their AGI exceeds certain thresholds.
By making a distribution directly from your IRA to a qualified charity in order to meet your minimum required distribution amount (assuming you met all the requirements for the exclusion), you can decrease the value of your AGI and potentially increase your allowable itemized income tax deductions.
Be careful, though, since certain rules apply to direct IRA distributions to charity. One rule is that the distribution must come directly from your IRA. That is, you must instruct your financial institution to make the distribution directly to the charity from your IRA. Only direct distributions to charity qualify. Next, the distribution must be to a qualified charity. Qualified charities include all 501(c)(3) publicly supported charities (this excludes non-operating private foundations, which are not publicly supported), but the distribution cannot be for the purpose of funding an donor-advised fund account.
The $100,000 IRA exclusion for a Qualified Charitable Distribution applies to each spouse. So a married couple could exclude a total of $200,000 from their AGI and benefit charity by taking advantage of the direct IRA distribution to qualifying charities.
Appreciated Long-Term Capital Gain Property
Are you holding onto appreciated, long-term capital gain property such as publicly traded stock that you purchased more than one year ago? Then donate the appreciated shares to charity, rather than cash. You generate a tax deduction equal to the fair market value on the date of the donation by donating the shares, and avoid the capital gain built into the shares.
Do be mindful of the charitable deduction limitations, however (a donation of capital gain property in excess of 30 percent of your adjusted-gross income is not deductible in the current tax year, but can be carried over an deducted in the subsequent five tax years).
Because brokerage firms can be busy this time of year, allow at least two to three weeks for the transfer to take place. Mutual fund shares can take even longer to transfer than stock shares. Contact your brokerage firm as soon as possible if you think you might want to donate shares to find out what deadlines they may have. It might not hurt to check with the charity you wish to support, as well. While most larger charities can easily accept gifts of stock, some smaller charities have limited, if any, experience with receiving stock gifts. If you run into this problem, consider using a donor-advised fund account to facilitate your charitable gifts. Charities offering donor-advised fund accounts have experience with property gifts.
But what if you like your investment? After the donation, simply re-establish the position. That way, you continue to own an investment you like, but you have eliminated the gain built into the stock shares, supported a charity of your choice, and generated a charitable deduction before year-end.
Depreciated Long-Term Capital Gain Property
If you have been holding stock shares for greater than one year and have lost money on the investment, whatever you do, don’t donate those shares to charity. You’re better off selling the shares and then donating the cash proceeds to charity. By selling the shares, you generate a capital loss that can be used on your tax return to offset capital gains. If you donate the shares, your charitable deduction is equal to the value of the shares on the donation date, and you don’t generate a loss when the shares are donated. So if you donate the shares, you permanently lose the tax benefit of a capital loss.
Supporting Liberty and Legacy
Of course, sometimes while you may have a need and desire to receive the tax deduction before year’s end, you may not have considered exactly where to place the donation to have the most impact.
Let me suggest two options you might consider. One is to open a donor-advised fund such as those offered at DonorsTrust. You can download a full prospectus here, but know that when you contribute into your account, you can immediately take your tax deduction (all donor-advised funds are 501(c)(3) public charities), but those dollars do not have to be distributed immediately. That gives you time to make giving decisions later. (Be careful – You cannot fund your donor-advised fund account from a direct distribution from your IRA – distributions from IRA’s to a donor-advised fund are not considered a distribution to a qualified charity.)
Alternatively, DonorsTrust recently established the Whitney Ball Memorial Fund (WBMF) to perpetuate the charitable legacy of DonorsTrust’s founding president. If you are looking for a charity to receive a direct qualified charitable distribution from your IRA before year-end, please consider contributing to the WBMF.
While you can’t make a qualified charitable distribution directly from your IRA to a donor-advised fund account, you can make the distribution to the WBMF. That’s because the WBMF is not a donor-advised fund account. Instead, the WBMF is a program of DonorsTrust, using general operating funds not subject to the advice of donors that are being set aside to perpetuate Whitney’s legacy. A donation to the WBMF is a donation to a qualified charitable organization DonorsTrust and you won’t be making a donation to a donor-advised fund. You can find additional information concerning the Whitney Ball Memorial Fund here.