Financial Planning Focus – Year-End Gifting Strategies

November 29, 2016
By Brian L. Mackin, CFP®

As we approach year-end, many clients are turning their attention towards whether, and to what extent, they want to gift to charity. And if so, is it more tax-efficient for those over age 70½ to make charitable distributions out of their IRA, or to give highly appreciated stock from a taxable account? As is often the case, it will depend on the specifics of your situation, but both have advantages over simply writing a check or giving cash.

In our previous newsletter, we discussed the ability to donate a portion of your IRA required minimum distribution directly to charity. For those who missed the article and are not familiar with the strategy, a Qualified Charitable Distribution (QCD) is a direct transfer of up to $100,000 from an IRA owned by someone over age 70½ to a qualified charity or charities. After years of last minute extensions, the QCD provision was made permanent (or as permanent as anything can be in the federal tax code) late last year, so you no longer have to wait until the 11th hour to make a decision. In addition to satisfying your annual required minimum distribution (RMD) up to the $100,000 limit, a QCD does not increase adjusted gross income (AGI), which is used to calculate itemized deduction phase-outs, the 3.8% net investment income tax, taxability of Social Security benefits, and other items. In addition, charitable gifts via a QCD work well for taxpayers who claim the standard deduction, as opposed to charitable deductions which require itemization. Keep in mind that the distribution check must be made payable to the charitable entity and not the IRA owner, and QCDs cannot be used to fund a donor-advised fund or private foundation.

Giving highly appreciated stock is another tax-effective strategy, and something we assist clients with all the time. By gifting stock with low cost basis instead of cash, you avoid paying capital gains tax on the appreciation and receive a charitable deduction (up to 30% of your AGI, with a 5-year carryforward) for the full market value of the stock on the date of the gift. For example, let’s say you invested $10,000 in a stock years ago. Now the shares are worth $17,000. By gifting the shares instead of writing a check, you get a charitable deduction of $17,000 and will never have to pay taxes on the $7,000 gain. The stock can be repurchased immediately, effectively resetting your cost basis.

A number of articles online comparing the two gifting methods conclude that giving stock is preferable over a QCD, because donating investments allows for a pre-tax contribution that also permanently avoids long-term capital gains. While this may be true in some cases, it assumes there aren’t other ways to avoid the capital gains, such as holding the security until death (and therefore receiving a step-up in cost basis), giving shares to family members in lower tax brackets, or offsetting gains with previous carry-forward losses on your tax return. For those in the top federal tax bracket, avoiding IRA income taxed at 39.6% seems preferable in my mind over long-term capital gains taxed at 23.8%. And depending on the level of charitable intent, there’s nothing to prevent you from utilizing both gifting methods in the same tax year. I recently worked with a client who had a pledge to their church that was in excess of her required IRA distribution. After satisfying the RMD, we used portions of a stock held for many years to complete the pledge.

Please call us or your tax adviser if you would like to discuss various gifting strategies in greater detail. Many custodians – including Fidelity and Charles Schwab – have deadlines in early December for gifting securities, so please contact us as soon as possible if this is something you are interested in pursuing.