If you own stocks, mutual funds or exchange traded funds outside of a retirement account, you and your favorite charities can benefit if you give shares directly to the charity. This month we talk to financial planner Michael Gorman about the benefits of donating appreciated stock and the simple steps such a donation requires.
Q: What are the tax advantages of donating appreciated stock?
A: If you were to sell stock you own and then donate the proceeds to charity, you would pay tax on the stock’s capital gains. If you’ve held the stock for more than a year, when you give shares directly to charity, you can deduct the full market value of the stock or fund. (If it’s been less than a year, your deduction is limited to the cost basis.)
The charity then sells the security and is not subject to capital gains tax, because it is a qualified charitable entity. Consequently, the charity gets the full value of the stock donation.
Q: Why is this a particularly good time to donate stocks, mutual funds or exchange traded funds?
The stock market has performed exceptionally well this year. For example, three main U.S. stock indexes closed at record highs at the end of October. As a result, many investors own stocks that have increased in value, making this a good time to transfer these stocks as a charitable donation.
Q: Can you give an example so folks can see why stock donations are a good alternative to donating cash?
A: Sure. Let’s say Jennifer would like to donate $2,000 to the Parks Foundation. If Jennifer has appreciated stock, she can make an in-kind donation of shares. Suppose she has held XYZ corporate stock for many years and the price per share is now $100, but Jennifer only paid $15 per share when she bought the stock. If she were to sell the shares to raise the money for the donation, she would incur a capital gains tax totaling approximately 24% depending on her tax bracket – about $400 in taxes.
Instead, she could give 20 shares worth $2,000 to the Foundation. She gets to deduct $2,000 from her income tax (depending on her situation) without paying a $400 capital gains tax for selling the stock. The Foundation can sell the 20 shares and net the full $2,000 without paying tax since it is a tax-exempt, 501(c)(3) entity. Of course, you should always check with your own financial advisor or tax professional before making a charitable contribution to make sure stock donations are right for your situation.
Q: How do I make a donation of stock?
A: Your broker or financial planner can arrange to transfer whatever quantity of shares you wish “in-kind” (without selling them) directly to the Parks Foundation, or any other charity of your choice. (The Parks Foundation provides details about donating stocks here.)
It is extremely important to notify the nonprofit when you donate shares. Charities receive gifts of stock with absolutely no identifying information. You must alert the nonprofit that your gift of stock will be transferred and provide your contact information so that the nonprofit can send you a letter acknowledging your gift.
Before donating, check with your tax professional to make sure you will benefit from the donation. Recent changes to tax laws may limit the amount that you can deduct as part of your itemized deductions on Schedule A of your tax return.
Q: Is there anything else donors should know?
A: There may be a variety of additional reasons why someone would want to donate stock. For example, an investor might have too much of a particular stock (a “concentrated position”) and want to divest some of it. Or an individual might have invested in a company and no longer want the stock because its prospects are not good or the investor dislikes its impact on the environment. In these examples, the investor has other valid reasons for wanting to divest a stock, and donating the stock to charity can provide tax advantages, as well.
I’ve supported charities this way myself and found it a financially wise decision that is also personally gratifying.
Michael Gorman is a Certified Financial Planner® with Creekside Partners in Petaluma. He and his wife Pat have supported the Parks Foundation for nearly a decade and are now monthly Park Pals.
Kathryn Peyton, a monthly Park Pal donor and Certified Financial Planner® enjoys an outing with her dogs at Gualala Point Regional Park.
We had the opportunity to interview Kathryn Peyton, CFP®, a financial advisor at Abacus Wealth Partners in Sebastopol. A long-time supporter of the Parks Foundation, Kathryn has been a monthly Park Pal donor since 2020.
The end of the year is typically a time when people make charitable donations. We talked with Kathryn about some of the reasons people might want to donate to nonprofits like the Sonoma County Parks Foundation through an IRA, and other tax-advantaged ways to make charitable contributions.
What is an IRA Required Minimum Distribution (RMD), and who does it apply to?
An RMD is the amount of money the government tells you that you must take as a distribution from an IRA or other tax-deferred retirement account every year once you turn 72 years of age. For individuals who inherit an account, you must take a Required Minimum Distribution even if you’re younger than 72. In this discussion, we are focusing on IRA accounts, because IRAs have a special ability to use the RMD to make charitable contributions.
A charitable gift made through a direct transfer of funds from your IRA custodian to a qualified charity is called a Qualified Charitable Distribution, or QCD. These distributions generally come from Traditional IRAs and Inherited IRAs; they can also come from inactive SIMPLE and SEP IRAs. Under some limited conditions, it may be appropriate to make a QCD from a Roth IRA; see a tax or financial advisor for more information on that.
Why should people consider making a charitable gift via their RMD?
All RMDs from Traditional IRAs are considered taxable income to the IRA owner. It’s like you are getting a salary every year from your IRA, and you have to pay taxes on it. If you make a charitable contribution with your IRA RMD, though, you don’t have to count that money as income.
This arrangement delivers multiple advantages. First, you can give more money away to charities that you love, and that always feels good. It also reduces taxable income that you otherwise would have, which lowers your taxes and can protect you from missing out on some tax credits. In addition, by donating some or all of your RMD, you may protect yourself from having to pay extra for Medicare. If your RMD raises your taxable income over $85,000 for a single individual or $170,000 for married filing jointly, you’ll experience a Medicare high-income surcharge, which increases your Part B and Part D premiums.
What do you tell your clients about making a Qualified Charitable Distribution?
If you’re going to make a QCD, it is absolutely essential for the distribution to go directly from your IRA to the charity. If your IRA custodian sends the funds to you first, and then you write a check, that money will be counted as income and you will be taxed accordingly. Some of our clients who like to give widely use a special checkbook drawn on their IRA to make contributions themselves; you can also ask your custodian to send checks on your behalf.
It’s important to note that some charities are not eligible to receive QCDs, even if they are a 501(c)3. For instance, if you have a Donor Advised Fund, you may not make a QCD to that account. In addition, you are not allowed to benefit from a QCD, so, for example, you can’t use your IRA to contribute to a charity golf tournament if you are participating or to purchase a Regional Parks membership.
Another critical point is that for the charitable gift to count towards this year’s Required Minimum Distribution, the IRA must disburse the funds before your RMD deadline, which is typically December 31. If you are really lucky and have a very large RMD, only $100,000 of your RMD can be used to make QCDs.
Are there other tax advantages to making Qualified Charitable Distributions?
Under the tax act passed in 2017, the standard deduction is much higher than it was previously. This situation makes it less likely that taxpayers will itemize their charitable contributions, and more likely that they’ll just take the standard deduction. Making a Qualified Charitable Distribution from your IRA enables older taxpayers to see a tax benefit from their charitable contributions, even if they don’t itemize.
Are there other year-end giving strategies to consider?
Because the stock market has performed well in recent years, many people own highly appreciated stocks. Donating stocks to a charity enables an individual to support a cause that is meaningful to her or him without incurring capital gains. Be sure to notify the nonprofit of your impending gift of stock, as the stock transaction information will not include your name or contact information.
Finally, it is always a good idea to consult with your tax advisor regarding your charitable giving plans.