Holiday spirit and year-end tax concerns usually spur charitable giving this time of year. That’s a constant, but every year’s conditions are a little different, and there are some special wrinkles for investors who are retired.
This year many investors, if not most, are sitting on big stock market gains, and Republicans in Washington are pushing hard to cut income tax rates. So what’s the best strategy for retired investors capable of making significant charitable gifts?
If tax rates are cut, the deduction for donations would be less valuable after this year, so many experts urge investors to give now.
“Tax reform is the elephant in the room, creating uncertainty this giving season, says Michael Montgomery of Montgomery Consulting, a fundraising consulting firm in Huntington Woods, Michigan. “If either the House or Senate version of tax reform ultimately passes and is signed into law, incentives for future charitable giving will be reduced.”
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Increasing the standard deduction, as Republicans have proposed, would reduce the number of taxpayers who itemize deductions like charitable contributions, reducing the value of charitable donations, he says.
Fortunately, investors can still get deductions on charitable donations this year. A deduction allows the generous to give more.
An investor sitting on big stock gains in an ordinary taxable account could face a big tax bill after selling those holdings. But that tax can be avoided by giving the appreciated assets to a qualified charity.
“If you have long-term appreciated securities — held more than one year — it might make sense to donate those directly to the charity instead of giving cash,” says Kay McFarlin, president and CEO of TIAA Charitable, a nonprofit that helps donors get the most bang for the buck.
“When you donate securities directly, your contribution is more effective because charities are exempt from the capital gains tax. It’s a win-win situation. Your charity of choice gets a bigger gift and you’ll receive an increased tax deduction based on the full fair market value of your securities.”
Check first to make sure the charity qualifies, she urges.
With stock prices so high, many investors can benefit from giving appreciated assets to a charitable remainder trust, says Michael A. Dinich, a planner with Your Money Matters in Sayre, Pennsylvania.
“With a charitable remainder trust a client transfers highly appreciated stock to the trust,” Dinich says. “The trust is able to sell the (assets) and avoid capital gains and income taxes. The client then receives income from the trust, and whatever remains in the trust upon death goes to the charity or charities of the grantors choice.”
The donor can also receive a tax deduction on the gift, though the calculations get tricky. The investor who does not have a lawyer or financial advisor may get help from the chosen charity.
It’s a good strategy, of course only if you’re sure you won’t need those assets yourself and don’t want to pass them to heirs, who could escape capital gains tax under the “step-up” rule. That changes the cost basis on taxable holdings to their value when they are inherited rather than the price paid by the original owner.
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Dinich says some investors purchase a life insurance policy to protect heirs, with the death benefit matching the value of the charitable donation.
A second deal for retirees allows tax-free treatment of gifts from retirement accounts like IRAs and 401(k)s. In 2015 Congress made permanent a rule that allows investors to escape income tax on up to $100,000 if the proceeds are given to charity through a process called the qualified charitable distribution. The exemption can be used to satisfy the required minimum distribution faced by IRA investors over 70½.
Again, the giver should be sure the assets won’t be needed, and should check with the charity and financial institution on the mechanics.
Another option is the charitable gift annuity, which allows the donor to give a sum but continue receiving income, says Jeff S. Vollmer, managing principal of Hyde Park Wealth Management in Cincinnati.
He also suggests givers consider a donor-advised fund, which allows the giver to direct the funds to charities over a number of years.
“Donors can contribute cash or securities to a DAF, receive a tax benefit in the year of donation, but retain rights to make gifts from an escrow-type account far into the future,” Vollmer says.
With a DAF, you can get a big tax deduction right away and have time to ponder which charities should benefit, McFarlin says.
“If you decide not to make grants right away, any investment growth is tax-free and can help you make more or larger grant recommendations to your favorite charities,” she says. “Plus, with a donor-advised fund, you consolidate all your giving and recordkeeping in one place. And, at the end of the year, you receive a single statement listing all your charitable grants. There’s no hunting for receipts during tax time. All the work is done for you.”
When making a donation, be sure to keep records, as the IRS is not as inclined to take taxpayers’ word for it as in the old days.
“You need to supply the IRS with tangible evidence of charitable giving when claiming tax deductions,” McFarlin says. “Credit card statements, canceled checks or written acknowledgements from charity groups usually suffice as proof of donation.”
A charity is required to acknowledge a donation totaling at least $250.
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“Just be sure you keep up with the documentation and remember deductions are only available in the year you make the donation,” McFarlin says.
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How Charitable Gifts May Be Affected By the GOP Tax Plan originally appeared on usnews.com
