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Tax Considerations Related to Charitable Giving

Posted by Admin Posted on Apr 18 2019

Donating Appreciated Stock - Consider donating appreciated stock from your investment portfolio instead of cash.

This tax planning tool is derived from the general rule that the deduction for a donation of property to charity is equal to the fair market value of the donated property. Where the donated property is “gain” property, the donor does not have to recognize the gain on the donated property. These rules allow for the “doubling up,” so to speak, of tax benefits: a charitable deduction, plus avoiding tax on the appreciation in value of the donated property.

Example: Tim and Tina are twins, each of whom attended Yalvard University. Each plans to donate $10,000 to the school. Each also owns $10,000 worth of stock in ABC, Inc. which he or she bought for just $2,000 several years ago.

Tim sells his stock and donates the $10,000 cash. He gets a $10,000 charitable deduction, but must report his $8,000 capital gain on the stock.

Tina donates the stock directly to the school. She gets the same $10,000 charitable deduction and avoids any tax on the capital gain. The school is just as happy to receive the stock, which it can immediately sell for its $10,000 value in any case.

Qualified Charitable Distribution – with the increase in the standard deduction many taxpayers are no longer seeing a tax benefit for their charitable contributions.  Taxpayers age 701/2 or older are allowed to direct up to $100,000 per year of their IRA distributions to charity. These distributions are known as qualified charitable distributions, or QCDs. The money given to charity counts toward the donor's required minimum distribution (RMD), but the distribution isn’t included in adjusted gross income. 

Keeping the donation out of the donor's AGI could have additional benefits, because doing so can (1) help the donor qualify for other tax breaks (for example, having a lower AGI can reduce the threshold for deducting medical expenses, which are only deductible to the extent they exceed 10% of AGI (for 2019 and thereafter)); (2) reduce taxes on the donor's Social Security benefits; and/or (3) help the donor avoid a high-income surcharge for Medicare Part B and Part D premiums (which kick in if AGI is over certain levels).

Timing of Charitable Contributions – Taxpayers who are on the bubble of itemizing vs taking the standard deduction should consider grouping charitable contributions in one year.  For example, if John and Jane have $20,000 in itemized deductions before charitable contributions and plan to give $4,000 in Years 1 and 2, that would equal $24,000 which is the standard deduction for a married filing jointly couple.  There would be no tax benefit from the contributions.  However, if they gave $8,000 in Year 1 and none in Year 2, they could take the itemized deduction of $28,000 in Year 1 and the standard deduction of $24,000 in Year 2.