Why You Should Never Write A Check To Your Favorite Charity

by | Dec 10, 2018 | Newsletters

By Aaron CFP®, Managing Director

Don’t Write That Check

We all have our favorite charities and some of us are fortunate enough to support those charities financially. Because of certain rules in the tax code there are typically better alternatives than writing a large check. Let’s look at two specific strategies.

Gifting Stock

Gifting stock that you have owned for more than one year and that has gone up in value is a great way to avoid capital gains taxes and support a non-profit organization. And if you itemize deductions you can take a charitable deduction for the stock’s fair market value on the day you give it away.

Let’s say you bought a stock for $4,000 ten years ago and it’s now worth $10,000. If you sold that stock and paid 20% Federal capital gains tax on the $6,000 of gain your tax would be $1,200. You would receive $10,000 from the sale of the stock, minus $1,200 in capital gain taxes, netting you $8,800 which you could then donate to your favorite charity. But if you gifted that stock to the charity then the charity, being a not-for-profit organization that does not pay taxes, would sell the stock and net $10,000 in proceeds from the sale. Neither you nor the charity would pay capital gains tax. That’s $1,200 more to your favorite charity. That makes a lot more sense than just writing a check, doesn’t it?

Donating Directly From Your IRA

If you donate to charitable organizations and are taking required distributions from your Individual Retirement Account, you should consider making donations directly from your IRA.

The tax law passed by Congress in 2017 doubles the standard deduction and limits itemized deductions for state and local property taxes to $10,000 (which affects many taxpayers in states with high property taxes and state taxes). This means that you may not be itemizing your deductions in 2018 and therefore not receive any deductions for your charitable contributions.

A “Qualified Charitable Distribution” allows anyone who is 70 ½ or older to donate money directly from an IRA to a charitable organization without that gift counting as income (up to $100,000 per year). Any money you transfer through a Qualified Charitable Distribution counts towards your required minimum distribution (the charity must cash the check by December 31).

For example, a client could make an annual gift to his or her alma mater directly from an IRA. Or a couple who donates regularly to their church could set up monthly distributions directly from an IRA. That way, instead of taking money out of the IRA and paying taxes before making the donation, they can send the funds directly to their favorite charities without having to pay taxes on an IRA distribution.

Another benefit of a Qualified Charitable Distribution is that it reduces your Adjusted Gross Income (AGI) which determines how much of your Social Security is subject to income taxes and determines the amount of your Medicare premiums in the following year.

Conclusion

There may be better ways than writing checks to support your favorite charity. Consider gifting stock and making donations directly from your IRA. Please contact your Wealth Advisor at Spotlight Asset Group or consult with your accountant to discuss these and other charitable giving strategies.

The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.

Aaron Kirsch CFP®, Managing Director

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Why You Should Never Write A Check To Your Favorite Charity

by | Dec 10, 2018 | Newsletters

By Aaron CFP®, Managing Director

Don’t Write That Check

We all have our favorite charities and some of us are fortunate enough to support those charities financially. Because of certain rules in the tax code there are typically better alternatives than writing a large check. Let’s look at two specific strategies.

Gifting Stock

Gifting stock that you have owned for more than one year and that has gone up in value is a great way to avoid capital gains taxes and support a non-profit organization. And if you itemize deductions you can take a charitable deduction for the stock’s fair market value on the day you give it away.

Let’s say you bought a stock for $4,000 ten years ago and it’s now worth $10,000. If you sold that stock and paid 20% Federal capital gains tax on the $6,000 of gain your tax would be $1,200. You would receive $10,000 from the sale of the stock, minus $1,200 in capital gain taxes, netting you $8,800 which you could then donate to your favorite charity. But if you gifted that stock to the charity then the charity, being a not-for-profit organization that does not pay taxes, would sell the stock and net $10,000 in proceeds from the sale. Neither you nor the charity would pay capital gains tax. That’s $1,200 more to your favorite charity. That makes a lot more sense than just writing a check, doesn’t it?

Donating Directly From Your IRA

If you donate to charitable organizations and are taking required distributions from your Individual Retirement Account, you should consider making donations directly from your IRA.

The tax law passed by Congress in 2017 doubles the standard deduction and limits itemized deductions for state and local property taxes to $10,000 (which affects many taxpayers in states with high property taxes and state taxes). This means that you may not be itemizing your deductions in 2018 and therefore not receive any deductions for your charitable contributions.

A “Qualified Charitable Distribution” allows anyone who is 70 ½ or older to donate money directly from an IRA to a charitable organization without that gift counting as income (up to $100,000 per year). Any money you transfer through a Qualified Charitable Distribution counts towards your required minimum distribution (the charity must cash the check by December 31).

For example, a client could make an annual gift to his or her alma mater directly from an IRA. Or a couple who donates regularly to their church could set up monthly distributions directly from an IRA. That way, instead of taking money out of the IRA and paying taxes before making the donation, they can send the funds directly to their favorite charities without having to pay taxes on an IRA distribution.

Another benefit of a Qualified Charitable Distribution is that it reduces your Adjusted Gross Income (AGI) which determines how much of your Social Security is subject to income taxes and determines the amount of your Medicare premiums in the following year.

Conclusion

There may be better ways than writing checks to support your favorite charity. Consider gifting stock and making donations directly from your IRA. Please contact your Wealth Advisor at Spotlight Asset Group or consult with your accountant to discuss these and other charitable giving strategies.

The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.

Aaron Kirsch CFP®, Managing Director

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