Current events have many Americans feeling confused and depleted. After our collective period of isolation and grief from the pandemic, we are now faced with a never-ending news cycle of international conflict, market volatility, inflation, and political debate. Times like these drive a desire for peace of mind, a sense of control, and greater meaning in our lives. As many of us re-evaluate our careers, our relationships and where we live, you may be reflecting on how your personal finances align with your goals. While wealth can grant an enhanced standard of living, it can also help build a legacy and improve the community. Charitable giving can help you give meaning to your wealth. It gives an opportunity to express yourself, support the issues you care about, and impact the world around you.
Amid ongoing uncertainty in our economy, it’s important to give smarter. Fidelity Charitable has identified five tax-efficient and impactful strategies for your consideration:
How it works: While the markets have been more volatile as of late, many investors still have appreciated assets because of the long-term gains over the last decade. By donating long-term appreciated stock (i.e., held for greater than one year) to a charity – including charities that sponsor a donor-advised fund program – you may improve your charitable tax deduction and end up with a larger gift than if you sold the securities and contributed the after-tax proceeds.
Potential benefits: You will generally be eligible to take a tax deduction for the fair market value of the investment contribution. You may also potentially eliminate the capital gains tax rate of 20% and the potential Medicare surtax of 3.8% that you would have otherwise incurred on the sale of the stock.1 If appropriate, you can also purchase new shares of the same security at a higher basis, which may minimize future tax liability when later sold.
A note on cash: You may believe that cash is the right asset to donate this year. Cash donations often have lower tax efficiency and may reduce the amount available to charity. Since donating appreciated assets can be a more advantageous strategy, be sure to discuss options with your financial advisor. When a cash donation is the best option, consider leveraging employer match opportunities to maximize your contribution.
How it works: Many investors are currently reviewing their portfolios with their advisors to adjust for current market conditions. During your review sessions with your advisor, you may identify that your portfolio has become increasingly exposed to such risk or has simply fallen out of alignment with your goals. Rather than selling the appreciated positions to rebalance your portfolio, consider making a charitable gift of the long-term appreciated asset via a donor-advised fund.
Potential benefits: You may be eligible to take a tax deduction for the fair market value of the asset and eliminate the capital gain tax and Medicare surtax. This also allows you to reset basis on the equity position and, as noted above, reduce your vulnerability to stock market corrections.
Keep an eye out for any merger & acquisition activity for the companies in your portfolios that may result in forced capital gains. Consider making a charitable donation to potentially reduce your tax liability.
How it works: Publicly held stock is not the only option for charitable giving; donating privately held interests can be another suitable strategy. If you have a family-owned business that you are looking to divest, donating a portion or all of the privately held interests to a charity prior to divestiture may have greater tax benefits than a private foundation. When using a donor-advised fund, this approach may also allow you to recommend multiple grants to different charities with just one asset and simplify what may be a complicated or emotional transaction.
Other privately held interests for consideration include C-corp or S-corp shares, restricted stock, limited partnership interests, cryptocurrency, and some alternative investments.
Potential benefits: Not only is it possible to minimize capital gains exposure under this strategy, but it may also allow for a tax deduction for the current fair market value of the donated assets, rather than the original cost basis (a private foundation must use the cost basis). Like other strategies, it is especially beneficial for anyone on the verge of a higher tax bracket.
Timing is important! The donation should occur before the sale of the asset.
How it works: If you experienced a particularly high-income year, donating to a donor-advised fund may reduce your taxable income. This can be helpful if you’re on the threshold of a higher tax bracket or if your bracket is higher now than what you expect in the future. It may also work well when there is a unique event (e.g., a financial windfall or work bonus) that is not anticipated to repeat. Remember that with a donor-advised fund, your contributions may be invested and have the opportunity to grow tax-free, which could result in additional dollars for charity.
Potential benefits: This strategy can reduce your taxable income in a given calendar year. When paired with a donor-advised fund, you can establish a charitable "nest egg" that enables giving now and in the future.
Consider a “bunching” strategy: frontloading multiple years of charitable giving in one year may allow you to surpass the itemization threshold, and then you can take the standard deduction in the off years. It does require sufficient funds to frontload giving.
How it works: Roth IRAs allow you to set aside after-tax income that grows tax-free for future use. Many people elect to convert their traditional IRA to a Roth IRA to allow for tax-free income in retirement; however, the conversion triggers a taxable event. Consider making a charitable gift in the same tax year to offset taxable income generated from the conversion. To ease the tax burden even further, consider accelerating multiple years of gifts into the same year (see “bunching” above).
Potential benefits: The charitable deduction can offset the increase in taxable income triggered by the conversion. This approach is well-suited for those with long investment time frames (ideally over five years) and those who expect higher taxes in the future.2
After the "stretch IRA" was eliminated, anyone who inherits an IRA now has 10 years after the death of the original account holder to withdraw the assets.
Throughout the article, we have made mention of a donor-advised fund as an effective tool to pair with each of the smart strategies. The Fidelity Charitable Giving Account is a donor-advised fund that provides a simplified approach to supporting charities while potentially maximizing charitable contributions and tax benefits—an approach that can transform the way you give. By establishing a Giving Account, you can:
With heightened economic concerns, consumers, as well as nonprofits, can be negatively impacted. As you navigate these turbulent times, consider prioritizing charitable giving during a time when nonprofits need your support the most. Reach out to your financial advisor or a charitable planning specialist with Fidelity Charitable to learn how donor-advised funds could be a more efficient way to support your favorite charities, and help regain some sense of control in our turbulent, stressful world.
1Assumes all realized gains are subject to the maximum federal long-term capital gain tax rate of 20% and the potential of Medicare surtax of 3.8%. This does not take into account state or local taxes, if any.
2If you are considering making a qualified charitable distribution (QCD) from an IRA account, remember that some charities are not eligible recipients. This includes donor-advised funds, private foundations and supporting organizations as described in IRC Section 509(a)(3).
How Fidelity Charitable can help
Since 1991, we have been a leader in charitable planning and giving solutions, helping donors like you support their favorite charities in smart ways.
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