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Next-level giving: Increasing your charitable impact
A thoughtful approach can stretch your donations -- and may provide you with significant tax advantages.
IT GOES WITHOUT SAYING: You lend your support to the people in your community and the causes closest to your heart. But when you make a donation, are you doing it in the most efficient way?
“Your giving can see a greater benefit when you’re intentional rather than simply reacting to requests,” notes Bryan Austin, Private Wealth Strategist for Merrill Private Wealth Management. “Being thoughtful about the timing and structure of your giving provides a greater opportunity to make a positive impact on your community and specific charitable cause.”
Get started by creating a plan for what you can give annually, then decide how to fund it. Throughout the year, as part of your regular portfolio reviews, you and your advisor can identify appreciated stock that can be used to fund your charitable giving budget. Whenever your portfolio gives you appreciation, consider harvesting some of it.
What’s more, major life events such as selling a business or reaching retirement provide additional opportunities to make large non-cash, tax-deductible gifts to charity. You might even decide to use milestone events like these as a segue to a second act as a philanthropist in your retirement.
If you’re looking to take your charitable giving to a higher level, consider these three tactics:
1. Harvest charitable gains throughout the year
By donating appreciated assets that you’ve held for more than a year, you can save on capital gains taxes (and potentially the net investment income tax). At the same time, you can deduct the full market value of the gift, subject to certain annual limits. “Charitable gain harvesting is a valuable tool that allows you to maximize your resources, so that you can fully realize your charitable vision and legacy,” says Donald Greene, National Donor-Advised Fund Executive, Bank of America Private Bank.
The upside of donating appreciated stock
Giving a long-held investment that has risen sharply in value can produce far greater tax savings than an equivalent donation of cash. This shows the difference between donating cash and donating $50,000 worth of stock for which you paid $10,000. This example is general in nature and special rules may apply to your specific situation.
| If donating $50,000 in cash: | If donating $50,000 in appreciated stock: | |
|---|---|---|
| Value of tax deduction | $17,500 | $17,500 |
| Tax benefit by donating appreciated stock | - | $9,520 |
| Total tax benefit | $17,500 | $27,020 |
Assumptions: Donate $50,000 in cash vs. donate $50,000 in appreciated stock with an adjusted cost basis of $10,000, so a $40,000 taxable gain, assuming the stock was held for more than one year
Income tax bracket: 35% ordinary income tax rate, 20% long-term capital gains tax rate + 3.8% net investment income tax
No AGI limits on deduction (deduction stays below 30% of AGI)
Because you may not be ready to make a charitable gift at that exact moment, Greene suggests combining charitable gain harvesting with a contribution to a donor-advised fund (DAF). You get an immediate charitable deduction for your donation, and the funds will be available for you to donate at whatever amount and timing you choose.
2. Plan ahead for a high-income year
Say you’re expecting a significant windfall from the sale of a business or property. In that event, you may want to work with your advisor to earmark a portion of the proceeds for charity – or harvest that appreciation for charity before you make the deal – in order to reap greater tax benefits. Gifting business interests in advance of the sale can result in a savings of a 20% capital gains tax on the proceeds, as well as a larger donation to charity than if you had made the gift in cash afterwards. Securing a large upfront deduction can provide a major benefit in a year when you’re likely to have more income than usual.
While many individual nonprofits may not be able to accept a donation of property or interests in a business, you can donate either through your DAF. For more on this strategy, see “How to integrate complex assets into your giving strategy.”
Another milestone event where charitable gain harvesting can come into play is retirement. For company executives, payouts from deferred compensation plans and the distribution of company stock at retirement may trigger a sizable bump in income. Donating highly appreciated assets in that year, especially those with a low basis for tax purposes, can allow you to save on taxes, provide funds for your charitable giving budget and reduce your investment risk by diversifying your portfolio and decreasing your concentrated positions.
3. Get more personally involved in philanthropy
As retirement draws near, many people consider making philanthropy a second career, using their wealth to fund a charitable legacy. When you make this kind of planning part of your retirement discussions with your advisor, you might discover you’re in a position to donate more than you might have thought. “Many affluent people overestimate how much money they will need in retirement, and as a result may short-change their charitable ambitions,” says Greene.
He recalls a client who was selling a business and decided to donate interests in the business to a family foundation, beginning a few years before the sale. Today, the foundation is the new family business, which his children have become very involved in running.
Working with your advisor, you can set aside a portion of your retirement income for philanthropy – identifying appreciated assets to donate to a DAF or family foundation – while still allowing you to support the lifestyle you want and fund an inheritance for your children.
In the end, these three tactics are a means to a goal, Greene says. “The point is to enable your wealth to have the greatest possible impact on your philanthropy, for yourself, your family and the causes you care most about.”
