In uncertain times like these, many of us seek a sense of control, peace of mind, and greater meaning in our lives. One way to achieve this is through charitable giving, as it allows us to express ourselves, support the causes we care about, and make a positive impact on the world around us. However, with ongoing economic uncertainty, it’s essential to be smart with our donations to ensure they have a lasting and meaningful effect.
Here are five tax-efficient and impactful strategies to help you be smart with your charitable giving:
Choose the Right Asset to Give:
Consider donating long-term appreciated stock to a charity, including those sponsoring donor-advised fund programs. By doing so, you can improve your charitable tax deduction and potentially end up with a larger gift compared to selling the securities and donating the after-tax proceeds. Donating appreciated assets can also help you eliminate capital gains tax and potential Medicare surtax, reducing your future tax liability.
Donate Appreciated Positions When Rebalancing Your Portfolio:
During portfolio reviews, instead of selling appreciated positions to rebalance, consider making a charitable gift of the long-term appreciated asset through a donor-advised fund. This strategy allows you to reset the basis on the equity position and reduce your vulnerability to stock market corrections. It may also result in a tax deduction for the fair market value of the asset, along with eliminating capital gain tax and Medicare surtax.
Divest Privately Held Interests via a Donor-Advised Fund:
Donating non-publicly traded interests to a charity before divestiture can offer significant tax benefits. This approach is particularly useful for family-owned businesses looking to divest or other non-publicly traded assets such as restricted stock, cryptocurrency, and alternative investments. By donating such assets to a donor-advised fund, you may minimize capital gains exposure and enjoy a tax deduction for the current fair market value.
Use Charitable Contributions to Offset High-Income Years:
If you experience a high-income year, donating to a donor-advised fund can reduce your taxable income, especially if you’re on the brink of a higher tax bracket. Additionally, the contributions to a donor-advised fund can grow tax-free, allowing you to create a charitable “nest egg” for giving in both the present and future. Consider “bunching” your donations in one year to surpass the itemization threshold, taking the standard deduction in off years.
Offset Increased Taxable Income with a Charitable Contribution During Roth Conversions:
For those considering Roth conversions, which trigger taxable events, making a charitable gift in the same tax year can help offset the increase in taxable income. This strategy is suitable for individuals with long investment time frames and those anticipating higher taxes in the future.
Remember, being smart with your donations involves thoughtful planning and consideration of the impact you wish to create. By employing these strategies, you can ensure your charitable giving aligns with your goals and makes a meaningful difference in the causes you care about. Always consult with a financial advisor to determine the best approach for your individual circumstances, and together, we can navigate these uncertain times with purpose and compassion.