- While charitable donations by check or cash are the most common, giving long-term appreciated securities may have attractive tax benefits.
- Establishing a donor-advised fund (DAF) can be a particularly effective way to give.
- A qualified charitable distribution (QCD) from an IRA can be used to satisfy your required minimum distribution (RMD).
- Before undertaking any strategy, consult your legal, tax, or financial advisor.
As the holidays approach, many people look for ways of combining their desire to help the causes they believe in with their desire to save on taxes.
Generally, if you itemize your deductions, making charitable contributions can decrease your tax bill, and since high‐income earners generally pay tax at higher rates, they may enjoy a particularly large tax benefit from charitable contributions.
Here are 5 strategies to consider that can help you make the most of your giving this year.
1. Give long-term appreciated securities, rather than cash
Donations made by cash or check are, by far, the most common methods of charitable giving. However, contributing stocks, bonds, or mutual funds that have appreciated over time has become increasingly popular in recent years, and for good reason.1
Most publicly traded securities with gains that you have not yet sold may be donated to a public charity. When the donation is made, the donor can claim the fair market value as an itemized deduction on their federal income tax return. The amount deducted can be up to 30% of the donor’s adjusted gross income (AGI). Other types of securities, such as restricted or privately traded securities, may also be deductible, but additional requirements and limitations may apply. No capital gains taxes are owed when the securities are donated, not sold.
2. Consider establishing a donor-advised fund
A donor-advised fund (DAF) is a giving vehicle sponsored by a public charity. It allows donors to make a charitable contribution to the public charity, receive an immediate tax deduction, and then recommend grants from the fund over time. Donors can contribute to the charity as frequently as they like and then recommend grants to their favorite charities whenever it makes sense for them. There are a number of public charities, including Fidelity Charitable, that sponsor DAFs. You can then recommend grants to other eligible charities—generally speaking, IRS‐qualified 501(c)(3) public charities—from your DAF.
Establishing a DAF allows you to make a gift and qualify for a charitable deduction immediately without needing to decide, until you're ready, on the charities to support with grant recommendations. It can also be a great way for charitably inclined individuals to offset a year with unexpectedly high earnings, or to address the tax implications of year‐end bonuses.
3. Consider using a charitable donation to offset the tax costs of converting a traditional IRA to a Roth IRA
One way to potentially reduce future taxes is to convert a portion of your traditional IRA assets into Roth IRAs. To help offset the tax cost of a Roth IRA conversion, consider making a charitable contribution. The essential difference between traditional retirement savings vehicles (whether they're IRAs or workplace plans) and the Roth versions is that with traditional IRAs, contributions are usually tax-deductible the year they are made and can grow tax-deferred within the account. The contributions and earnings are then taxed upon withdrawal.
Roth IRA contributions are not tax-deductible. You can make qualified withdrawals from your Roth IRA anytime, tax- and penalty-free, if you meet certain requirements. You may have to pay taxes and/or penalties on nonqualified withdrawals from a Roth IRA that go beyond your accumulated contributions, and that includes withdrawals of converted balances.2
Roth accounts may make sense if you believe your current tax rate is lower than it will be in the years you’ll make withdrawals; however, there are many other factors to consider. (For more on Roth conversions read Viewpoints on Fidelity.com: Tax-savvy Roth IRA conversions)
Converting in a year in which you can claim a large tax deduction, such as an itemized charitable deduction, can be helpful in offsetting the taxes due to the Roth conversion and may give you an opportunity to give to a charity while also reducing your future taxes.
4. Consider donating complex assets
Donors may also contribute complex and illiquid assets—such as private company stock, restricted stock, real estate, alternative investments, bitcoin, or other long-term appreciated property—directly to charity. The process for making this type of donation requires more time and effort than donating cash or publicly traded securities, but it has distinct advantages. These types of assets often have a relatively low cost basis. In fact, for entrepreneurs who have founded their own companies, the cost basis of their private C-corp or S-corp stock may effectively be zero.
Contributing non-publicly traded assets to charity, however, involves additional laws and regulations, so investors should consult their legal, tax, or financial advisor. Also, not all charities have the administrative resources to accept and liquidate such assets. But many public charities with DAF programs, such as Fidelity Charitable, are able to accept these assets and can work with advisors, providing them with guidance throughout the process. (For more on DAFs, read Viewpoints on Fidelity.com: Strategic giving: Think beyond cash)
5. Over 70½? Consider a qualified charitable distribution (QCD) from an IRA
If you are at least age 70½, have an IRA, and plan to donate to charity this year, another consideration may be to make a QCD from your IRA. This action can satisfy charitable goals and allows funds to be withdrawn from an IRA without any tax consequences. A QCD can also be appealing because it can be used to satisfy your required minimum distribution (RMD)—up to $100,000 for tax year 2019.
QCDs may be appealing if you have few other deductions or if you are already close to your charitable deduction limitations. Because the tax-free QCD is never reported as a deduction, it is not counted against the charitable limits and does not require itemization to be effective.
Alternatively, if you are subject to an RMD and have a desire to contribute to a charity, you could take the RMD proceeds as a taxable distribution and use them to make a charitable donation. Your IRA distribution would then be reported as income, but the subsequent charitable contribution using the proceeds from the RMD would generally offset the tax consequences—to the extent that the limits allow it.
Tip: DAF sponsors such as Fidelity Charitable are not eligible recipients for QCDs, even though they are public charities. Seek professional advice about QCDs, and visit Fidelity's Learning Center for more on QCDs.
Before undertaking any of these giving strategies, you should consult your legal, tax, or financial advisor. But each of the strategies, properly employed, represents a tax‐advantaged way for you to give more to your favorite charities.