The Importance of Giving - Parsec Financial

For many people, charitable giving – either by giving money or time – is an important personal value. For those of you who already have charitable intent, then a bit of planning will ensure that your gift is optimized from a tax standpoint, which is a true win-win for both you and the charity you choose to support.

This need for careful planning was made ever more important by the recent Tax Cuts and Jobs Act (TCJA). The TCJA increased the standard deduction to $24,400 for a couple with Married Filing Jointly status. So, unless you plan to itemize deductions above the standard deduction, a charitable donation will not result in a tax deduction. Fortunately, there are gifting techniques available that allow you to give to charity and still benefit from a lower tax bill. The use of a Qualified Charitable Distribution (QCD) from an IRA or the funding of a Donor-Advised Fund (DAF) with highly appreciated securities can both be good options.

If you are over 70½ then a QCD directly from your IRA may be a good option.

Once you are older than 70½, the IRS requires that you take a Required Minimum Distribution (RMD) from your traditional IRA. This RMD is considered normal income and is taxed as such. If you take your RMD and then make a charitable contribution, that contribution is considered a “below the line” itemized deduction and only impacts your tax bill if itemized deductions exceed the new threshold.

A QCD, on the other hand, is “above the line,” removing the contribution from your RMD and reducing taxable income. Consequently, you receive the full benefit of the charitable contribution regardless of itemized deductions. The QCD returns the win-win to your charitable donation!

Unfortunately, if you are younger than 70½ then a QCD is not an option. In this case, the donation of appreciated securities is likely your best bet for a tax advantage.

The use of appreciated securities allows the donor to deduct the fair market value of the donation without paying capital gains taxes on the appreciation. Not only is the inevitable capital gain avoided, but an itemized deduction is also gained if it exceeds the standard deduction, and you have contributed to charity; win-win-win!

If you commit to giving annually, then the use of a DAF and charitable bunching can help you clear the hurdle of the standard deduction. Charitable bunching allows you to make several years’ worth of donations at once, greatly increasing this year’s deduction. An appreciated security is transferred to a DAF, sold and reinvested. Annual charitable gifts are then made from the fund. Due to the charitable status of the DAF, capital gains taxes are avoided and the donor utilizes the full value of the appreciated security in the year the gift is made to the DAF. And since the DAF can be invested, the size of the account has the possibility of growth, further benefiting the charities of your choice.

As you can see, the use of QCDs or DAFs can create win-win situations. Your charity of choice receives a donation and you can reduce your tax bill. Careful consideration of your personal circumstances is needed to determine which strategy is best for you. Contact your Parsec financial advisor to discuss the options.

In the meantime, you can further educate yourself on charitable giving by reading our recent whitepaper: Four Strategies to Help Maximize Charitable Deduction Contributions.

Ben Blake
Portfolio Manager