As the holidays approach, people look for ways of combining their desire to help the causes
they believe in with their desire to save on taxes. For the charitably inclined, there are strategic
ways of giving that can accomplish both goals.
Generally, if you itemize your deductions, making charitable contributions can decrease your
tax bill, and with higher tax rates for high‐income earners, there is an increased tax benefit for
charitable contributions. If you are already giving or would like to start, here are a few
suggestions to maximize your giving nature.
1. Give appreciated securities instead of cash
Donations made by cash or check are, by far, the most common methods of charitable giving.
However, contributing stocks, bonds, or mutual funds that have appreciated over time has
become increasingly popular in recent years.
Most publicly traded securities with unrealized long‐term gains (meaning they were purchased
more than a year ago and have increased in value) may be donated to a public charity, without
the need to sell them first. When the donation is made, the donor can claim the fair market
value as an itemized deduction on his or her federal tax return—up to 30% of the donor’s
adjusted gross income (AGI). Other types of securities, such as restricted or privately traded
securities and donations to nonpublic charities, may also be deductible, but additional
requirements and limitations may apply.
When the securities are donated, no capital gains taxes are owed because the securities were
donated, not sold. The greater the appreciation, the bigger the tax savings will be. Here is a
hypothetical example: A couple, Bob and Mary, purchased a publicly traded stock 10 years ago
for $20,000, and it is now valued at $50,000. Let’s assume their taxable income places them in
the 20% capital gains tax rate and they don’t have any long‐term capital losses available to
them to utilize. If they sell the stock first and then donate the after‐tax proceeds to a public
charity, they will pay a federal long‐term capital gains tax of $6,000 on the $30,000 of gains,
leaving $44,000 ($50,000 − $6,000) for their charity, and they should then be able to claim the
$44,000 donation as a federal tax deduction.
If, however, Bob and Mary donate the stock directly to the charity, the tax calculation is based
not on the gain but on the amount donated, and their tax deduction increases to $50,000. As a
result of using this method, their charity receives an additional $6,000. One additional
consideration: If you have long‐term appreciated assets with an unknown original value,
donating the assets directly to charity can save you the time and trouble of finding out the
original basis and paying the applicable capital gains tax.
2. Consider using a charitable donation to offset the tax costs of converting a traditional IRA to a Roth IRA
Even with higher top income tax rates, many investors are considering converting from a
traditional IRA to a Roth IRA. In addition, the American Taxpayer Relief Act of 2012 made it
possible for active employees to convert a 401(k), 403(b), or 457(b) plan account to its Roth
counterpart within the same plan.
The most essential difference between traditional retirement savings vehicles (whether they’re
IRAs or workplace plans) and the Roth versions is that with the former, contributions are
usually tax deductible in the year they are made and can grow tax deferred within the account;
the contributions and earnings are then taxed at “the back end” (i.e., upon withdrawal). Roth
IRA contributions are not tax deductible. You can withdraw contributions you made to your
Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on
earnings in your Roth IRA.2
Roth accounts may make sense if you believe your current tax rate is lower than it will be in the
years you’ll make withdrawals; however, there are many other factors that must be evaluated
to determine what makes sense in your individual situation.
Any time you convert a traditional retirement savings account into a Roth, you will owe taxes
on any pre-taxed amounts converted. Depending on the amount converted and your tax rate,
the taxes on the Roth conversion can be significant.
Converting in a year in which you can claim a large tax deduction, such as a charitable
deduction, can be helpful in offsetting the conversion taxes. By taking a close look at your
individual situation, it may make sense to develop a strategy of using a charitable deduction to
offset conversion taxes. Developing such a strategy may give you an opportunity to give to a
charity while also reducing your taxes.
3. Consider a Qualified Charitable Distribution (QCD) from an IRA
The qualified charitable distribution (QCD) option emerged after Hurricane Katrina in 2005 and
was made permanent by Congress in 2015.
If you are at least age 70 1⁄2, have an IRA, and plan to donate to charity this year, another
consideration may be to make a QCD from your IRA. This action can satisfy charitable goals and
allows funds to be withdrawn from an IRA without any tax consequences. A QCD can also be
appealing because it can be used to satisfy your required minimum distribution (RMD).
QCDs may be most appealing if you have few other deductions or if you are already close to
your charitable deduction limitations. Because the tax-free QCD is never reported as a
deduction it is not counted against the charitable limits.
Alternatively, if you are subject to an RMD and have a desire to contribute to a charity, you
could take the RMD proceeds as a taxable distribution and use them to make a charitable
donation. Your IRA distribution would then be reported as income, but the subsequent
charitable contribution using the proceeds from the RMD would generally offset the tax
consequences—to the extent that the limits and phaseouts allow it.
Finally, note that QCDs are limited to $100,000 in 2017, so if your RMD is larger than that, you
might still need to take a conventional distribution in addition to your QCD.
Once again, before undertaking any of these giving strategies, you should consult your tax
advisor or give us a call. Properly employed, each of these strategies represents a tax‐
advantaged way for you to give more to your favorite charities.