Tax-smart tips for year-end giving
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There are ways of giving tzedakah that give you more than just a standard tax deduction and can reduce year-end headaches. Here are some of them.
Gifts of stock
Gifts to charity don’t have to always be just cash. You can give other assets, such as stock.
Normally when you sell long-term appreciated securities, you are liable for tax on the capital gains. But not when you give shares to charity. If you have stock you’ve held for more than a year, you can get a charitable deduction and eliminate your capital gains liability. This can also be a good strategy for offsetting other capital gains taxes you’ve incurred.
If you have stock that is depreciated, you can sell the stock first, donate the cash proceeds, and take deductions for both the capital loss and the charitable donation.
Stock gifts usually come out in odd amounts. If you would like your stock gift to be distributed in even amounts to multiple charities, consider starting a donor-advised fund.
Donor-advised funds are like tax-deductible charitable investment funds, with many personal and financial benefits. They can allow you to maximize your tax deduction in a given year, manage your giving more easily, and even involve your children in your giving.
Donor-advised funds are housed at selected nonprofit organizations (such as the Jewish Community Foundation of the East Bay). You can contribute up to your maximum deductible amount — or more if you wish. Then, over time, you can make grants to qualified charities you choose.
For those fortunate enough to experience a windfall event, or otherwise have a big tax to pay, this type of fund can reduce their tax bill and avoid having to make major philanthropic decisions under time pressure.
A donor-advised fund can also be used to “pre-pay” several years’ worth of annual gifts.
Donor-advised funds are invested, allowing donors to eventually give from the appreciation of the fund as well as the principal. Unlike your own investments, the assets appreciate tax-free. The sponsoring organization does all the administration and management. It’s like a family foundation, but without the expense and effort.
You can also contribute stock to the fund, where it is turned into liquid assets for distribution in even amounts.
Perhaps best of all, if you have children, a donor-advised fund can create a vehicle for you and your children to explore philanthropy. Together you can decide what causes and organizations to support and how much to give — exploring your values along the way.
Qualified IRA distributions
If you are 70 or older and have an IRA (Individual Retirement Account), you are required by law to take a required minimum distribution (RMD) annually by Dec. 31 or face penalties. The distribution creates income tax liability.
In 2013, you can give up to $100,000 from your IRA to qualified charities. By transferring your required minimum distribution or more to charity, you could get better tax savings than with a charitable deduction.
Unfortunately, IRA gifts to donor-advised funds and life income gifts (such as charitable gift annuities or charitable remainder trusts) do not qualify for the exclusion. But many times it may make sense to pay pledges from your IRA first, because of the favorable tax treatment. And who knows — it may give you a little something extra to make a bigger difference this year.
Content provided here is informational only. We recommend that you contact your accountant, attorney, or financial advisor for more detailed information appropriate to your individual financial situation.
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