Year-End Tax Gifting Strategies

Josh DeForest, CFA, CFP®

Executive Managing Director


The end of the year is a popular time to give to your favorite charities and causes. This makes now a good time to think about your donations and consider how you can be more strategic and intentional about your giving. A little planning upfront about your philanthropy can have an even bigger impact on your beloved charities and can also improve your financial plan, helping to minimize your tax liabilities.

Year-End Tax Gifting Strategies

Planning is crucial for your giving strategy

For many people who are charitably inclined, donating to their favorite causes tends to be separated from their long-term financial and tax plan. Sure, most people know you can get a tax deduction for giving money to a charity or religious organization. Further, thanks to recent changes in tax law (largely the higher standard deduction and limitations on other itemized deductions) some more astute givers have engaged in “bunching strategies” where they gift extra in certain years and less in others to maximize their tax situation.

As we approach the end of the year, it’s an opportune time to think about how you can be strategic about your giving and also help improve your overall tax situation. Most givers don’t fully appreciate the options that are available to them and the positive effect that a little extra planning can have on their financial and giving plan. By giving smarter, donors can give more to the charities they care about while minimizing taxes.


Consider a donor-advised fund to plan your giving

There are many ways you can support your beloved charities and causes. A donor-advised fund is a giving vehicle that allows donors to pass money through to charities. It allows you to fast forward the tax deduction you get with giving to a charity and provides you the flexibility to decide when and how much to give to your supported causes. Additionally, the funds can be invested over time and grow. There are two important things to know about donor-advised funds:

  1. You get the tax deduction when the money goes into the donor-advised fund, not when you gift to the charity; this means that the cash, securities or other assets you put into the donor-advised fun are considered irrevocable gifts (meaning they are no longer yours).
  2. You can give cash or other assets that have appreciated in value. When you donate appreciated assets, you avoid the embedded capital gains tax because the charity receiving your appreciated assets can sell the asset(s) and not incur any taxes.

There are other advantages and benefits to using a donor-advised fund to plan out your giving. Planning upfront can help your favorite causes get the maximum benefit from your giving while allowing you to minimize or eliminate capital gains taxes, which currently have a rate as high as 23.8% (including the Net Investment Income Tax).


Donating appreciated assets while minimizing your tax implications

According to the 2016 Fidelity Charitable Giving Gap Report, 80% of donors have appreciated assets, but only around 21% of them actually donate them, missing out on an important benefit. Many people continue to give even after they retire, but the value of the tax deduction is drastically reduced when their income is lower (as is the case during retirement). For example, let’s say a couple is about to retire. In the year before they retire, their income is expected to put them in the highest 37% tax bracket. In working with their advisor, they project that they will be in the 22% tax bracket in retirement. The couple planned on donating $10,000 per year for the next 15 years, for a total amount of $150,000. By moving up their giving to before they retire, when they would be taxed at the higher 37% tax threshold, they would benefit from an extra 15% on their gifts. That’s an additional tax savings of $22,500, and the gifts would have an immediate impact on the causes and charities they support. It’s important to note that the couple worked closely with their advisor and tax professional to plan for these events, but this scenario highlights the power of planning for charitable giving.

Now, let’s say this same couple decides to give all $150,000 in that year before they retire. What assets should they consider donating? Should they write a check to a donor-advised fund or is there another option? The simplest answer is to donate an asset that has appreciated. The couple decides to use a mutual fund they purchased initially for $75,000 that is now valued at $150,000. If they sold that mutual fund during retirement to fund their charitable giving, they would likely pay 15% capital gains tax or $11,250 (assuming no growth) over the next 15 years. By donating this asset to the donor-advised fund, they do not have to recognize this gain on their tax return.

In total, by gifting earlier than planned and using appreciated assets as part of their gifting strategy, this couple is able to save an additional $33,750 in taxes just by coordinating their charitable giving, tax, and financial plans into a holistic picture.


Donating complex assets

There are other benefits to thinking through your giving activities and planning out these events. For example, let’s consider these scenarios: You’re a business owner and sell your business, or you earn a higher income in one year due to bonuses or a company buyout.

In this type of a situation, it makes sense to do more charitable giving in years when tax rates are the highest. These instances also highlight where you can consider donating assets not limited just to cash or what’s in your brokerage account. Complex assets—like business interest from a business sale, residential or commercial real estate, stock options or restricted stock, private equity interests, cryptocurrency, oil and gas royalty interests, among others—can also be used to fund your giving strategy.

For example, if you’re looking to sell a private business (an LLC, LC, LP, or an S corporation or C corporation), prior to engaging in the sale, you might donate a fraction of your business interest to open and fund a donor-advised fund. Then when the business is sold, the donor-advised fund receives a portion of the sale and you would not bear the tax burden on that portion of the sale.

Further, many workers often receive restricted stock or other forms of equity compensation that can have a lot of embedded tax implications. Investors who hold concentrated positions sometimes delay making decisions to diversify out of their holdings because there can be significant tax liabilities. But by using your concentrated equity holdings to fund a donor-advised fund, you can match these assets with your philanthropic goals. By removing a concentrated position from your holdings, you can also help improve your financial plan by diversifying your assets.

For executives with restrictions on when they can sell securities, a donor-advised fund can be used in conjunction with their 10b-51 plan, which is an executive plan that helps avoid trading impropriety by setting up ongoing donations to the donor-advised fund.

An important consideration with complex assets is that you must plan early. In order for business interests to be categorized as a donation, for example, they typically have to be gifted in advance of a sell agreement. Additionally, business valuations, appraisals, or other actions may need to be completed.


Now is an optimal time to review your tax gifting strategy

With the changes we’ve seen in the financial markets this year and the greater world at large, now is an ideal time to review your giving and think about how it can be incorporated into your financial plan. And for 2020 in particular, the CARES (Coronavirus Aid, Relief, and Economic Security) Act, has provided additional tax benefits when donating to charities and causes you care about. For those not using a donor-advised fund, there is plenty of opportunity to give to your favorite causes and receive a tax benefit. If you use cash as your donation, you can lower your taxable income up to 100% of adjusted gross income, and if you use stock you can lower your taxable income up to 30% for a 501(c). In addition, if you are 70 1/2 or older, you can donate up to $100,000 directly from your retirement account as a qualified charitable distribution. While this would not count as a deduction, it is not counted as income for you this year.

Many people leave something on the table when it comes to planning charitable giving. Less money paid in taxes means a potentially greater impact for the charities and causes that you want to support. By putting together a comprehensive plan that incorporates your assets, your taxes, and your giving, you can make the best use of those funds to have the greatest impact possible. We encourage you to speak with your advisor and tax professional about how we can help you implement a giving strategy.

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