There are several ways to pass along some of your wealth to a favorite charity. Some approaches can be more “tax-efficient” than others. Before taking action, speak to your financial and tax advisor. However, allow us to provide a summary of some methods and their advantages.
Strategy #1: Write a check. Easy, not complicated and you may be able to deduct the amount on your tax return. Again, remember, speak to your tax advisor to confirm the tax benefits for you.
Strategy #2: Select some shares of stock, mutual fund or ETF that you own in your “after-tax” portfolio that has gone up in value (the more up the better). Instruct your financial advisor to transfer the shares to an investment account owned by the charity.
Advantages: You get a tax deduction for the fair market value of the shares when they are transferred (again, check with your tax advisor). Any gain you earned on the shares is NOT taxed to you and the charity is exempt from taxes, so they don’t pay tax on any gain when they sell the shares.
· In this example, the shares are worth $10,000 (or $100,000 for a larger gift) on the day you give them to the charity.
· In this example, you paid $4,000 (or $40,000) for the shares when you purchased them.
· If you sell the shares, you will pay long-term capital gains on the profit.
· Instead, you decided to give the shares to a charity. Therefore, you pay no tax and neither does the 501c3 not-for-profit charity.
· Bottom-line, the charity receives shares valued at $10,000 that only costs you $4,000.
Disadvantages: If the stock continues to go up, you no longer own as many shares because you gave some away.
Solution that becomes a new advantage: You use the $10,000 cash you were considering giving to charity to purchase shares of the same stock (mutual fund or ETF) you just gave way. But now you are paying $10,000 for the shares and establish a new “higher cost basis” for the shares. When and if you sell them in the future, you will only pay taxes on the gain above the new price of $10,000 and not the original $4,000 price. So now you have two tax breaks: 1) for the shares you gave way today; 2) future tax benefits for shares you may sell in the future.
Strategy #3: If you have an IRA, 401k or 403b and are old enough to be taking “Required Minimum Distributions” you can instruct the plan custodian to send all or part of your RMD directly to a charity (or charities) directly rather than to your bank account. This is known as “Qualified Charitable Distribution” or QDC.
When the RMD is paid to your bank, it is fully taxable to you. If you then give all or a portion of that money to a charity, the amount may or may not be deductible on your tax return. So will pay tax on the distribution to your bank account but you may not get a deduction for the gift to charity.
However, if the retirement account custodian sends the money directly to a charity, your tax advisor codes this on your tax return to tell the IRS you never received the money and it went directly to the charity. Therefore, the charity gets the money you wanted to give them and you do not pay taxes on the RMD. You and the charity both win. Again, coordinate this with your financial and tax advisors as well as the retirement plan custodian.
The same principals may apply to annuities, real estate and other investment assets for gifts to a charity during your lifetime or a gift from your estate. However, the rules vary for each type of investment. Therefore, check with your financial and tax advisor.
Wollman Wealth Designs, Inc is a financial services and investment firm in Escondido, CA partnering with families, friends and clients in San Diego County and around the country. Please visit our website, call the office or send us an email with your comments or questions.
Securities offered through Cetera Wealth Services, LLC, (doing insurance business in CA as CFGAN Insurance Agency LLC: CA Insurance License #0644976), memberFINRA/SIPC. Advisory Services offered through Cetera Investment Advisers LLC, a registered investment adviser. Cetera is under separate ownership from any other named entity. CA Insurance License #0604093
The views stated in this letter are not necessarily the opinion of Cetera Wealth Services, LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. For a comprehensive review of your personal situation, always consult your legal advisor. Neither Cetera Wealth Services, LLC, nor any of its representatives provide tax or legal advice.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. Past Performance does not guarantee future results.
An investment in the fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve your $1.00 per share, it is possible to lose money in the fund.
Bank certificate of deposits are insured by an agency of the Federal government and offer a fixed rate of return whereas both the principal and yield of investment securities will fluctuate with changes in market conditions.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. Past Performance does not guarantee future results. A diversified portfolio does not assure a profit or protect against loss in a declining market.
S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.