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You’re expecting to have a great year. Maybe you’ll be getting a bonus or raise, or will be realizing some gains from long-term investments. That could also mean that you’re heading toward a bigger tax bill than you were expecting.
But good news: as you think about your annual charitable giving, you might have some additional opportunities you can pursue now that may be particularly helpful with offsetting taxes in a high-income year—and that can help you avoid a year-end scramble to give.
Instead of writing a check, or selling your non-cash assets like stock, mutual fund shares, or real estate and donating the after-tax proceeds, it may be advantageous to donate these assets directly to charity. You’ll get two significant benefits, as long as you’ve owned the assets for more than a year. You’ll generally be eligible to claim a tax deduction in the amount of the full fair market value, and neither you nor the charity will pay any taxes on the gain. Because of this, you will be able to give as much as 20 percent more to charity than had you sold the asset and donated the after-tax proceeds. You also can donate stock that has significantly appreciated, and then buy more of the same stock, essentially “resetting” the cost basis at a higher amount.
A charitable gift that combines both cash and long-term appreciated securities may create a larger deduction than contributing securities alone. When you donate cash, generally you can give up to 60 percent of your adjusted gross income and deduct the contribution in the current year. Donations of publicly traded stocks, bonds or mutual funds that you’ve held for more than a year are generally deductible at fair market value, and current year deductions can be in amounts up to 30 percent of your adjusted gross income. If both types of contributions are made, the IRS has an ordering mechanism in place to determine which deductions are taken first and to what extent. It’s also possible to carry forward any unused deductions for up to five years.
“If you’re having a high-income year, it is the time to make sure you’ve fully taken advantage of all possible deductions,” said Tony Oommen, vice president and charitable planning consultant at Fidelity Charitable. “For the charitably inclined, maxing out your deductions is a strategy that could make a lot of sense and is worth discussing with your tax advisor.”
Whether you choose to donate cash equivalents, stock or other appreciated assets, a donor-advised fund is a simple and efficient way to make a donation quickly and be eligible for a tax deduction this year. Rather than scrambling to decide how to split up the gift among charities, and then writing out checks or transferring stock to multiple charities, you can make a single donation to set up a donor-advised fund, like the Giving Account® at Fidelity Charitable. A donor-advised fund is a dedicated charitable account used for the sole purpose of supporting charities you care about. You get a deduction for contributing funds to Fidelity Charitable, which is a public charity. Then, you’re able to support any IRS-qualified public charity on the timetable that best suits you by recommending grants from the account to the charities you care about. The fund also can be invested for potential growth, possibly resulting in even more money for charity.
This is a great strategy for people who may be thinking about retirement. By front-loading giving to a donor-advised fund while you’re still in your high income-earning years, you’ll be able to both get additional tax savings when you need them—and pre-fund your charitable giving during retirement, when income may be lower. But it is also useful for anyone with a significant capital gains event or experiencing a high-income year and needing a little more time to decide which charities to support. “It is a great, great vehicle for the 99 percent of the population out there who do charitable gifting, and they make it very easy to gift,” said Elda Di Re—a partner at Ernst & Young with a focus on tax, financial and charitable planning—in an interview on PBS’s WealthTrack.
The annual deadline for income tax charitable deduction is December 31. With many people having gains in their investment portfolios due to the long bull market, coupled with the impact of tax reform, it may be the perfect time to think about putting tax-smart giving strategies to work for you. However, it can take longer to contribute some types of assets than others. You’ll want to plan ahead to make sure you can maximize your deduction for your charitable giving and create the largest impact for the charities you care about.
Want to take advantage of tax-smart giving methods this year to make the most of your donation?