If you are a high-income earner, charitable giving is a great way to help make a difference in your community while also reaping the tax benefits associated with your gift. Cash is by far the easiest asset to give—but it is also the least tax efficient. Instead of gifting cash to the charity of your choice, let’s look at gifting highly appreciated assets.
Instead of gifting cash to the charity of your choice, let’s look at gifting highly appreciated assets. For example, if you have Apple stock that you paid $5 for and it is now worth $100, you can gift that stock directly to the charity without first having to pay taxes on it. Once the charity receives the stock, it can sell the stock for cash and avoid paying tax on the gains since charities get a special tax break. As long as you have held the stock for over a year, you still get a tax deduction for the full $100—even though you paid only $5 for it.
It may also be worth lumping several years’ worth of gifts into one tax year. If you do not itemize your taxes because the standard deduction is so large, then you aren’t able to claim a deduction for your charitable gifts. Instead, if you gave several years’ worth of gifts in one year to get yourself over the standard deduction limit, you could receive a meaningful deduction.
It may also be worth lumping several years’ worth of gifts into one tax year. If you do not itemize your taxes because the standard deduction is so large, then you aren’t able to claim a deduction for your charitable gifts. Instead, if you gave several years’ worth of gifts in one year to get yourself over the standard deduction limit, you could receive a meaningful deduction.
Let’s look at two examples. For 2022, the IRS standard deduction is $12,950 for a single filer ($25,900 for married couples filing jointly). Let’s say as a single filer you have $10,000 in itemizable deductions, of which $7,000 is a charitable donation.
In the first example, you continue giving $7,000 each year. Since your $10,000 in itemized deductions is lower than the standard deduction of $12,950, you choose not to itemize, and you take the $12,950 deduction. In this case, you would have received the same deduction even if you gave $0 to charity, since you would still be under the standard deduction amount.
In the second example, if you give $21,000 in a single year and nothing for the following two years, your total deductions in the first year are $24,000, which is over the standard deduction. Your deduction continues to be $12,950 for the other two years with no further gifting.
If your charity is unable to accept stock gifts, a donor advised fund (DAF) can be used to accept stocks and convert them into cash for the charity without tax consequences. A donor advised fund is a charitable investment account that allows a donor to make a charitable contribution in the current year and take the deduction while making distributions over later years, if the donor wishes. The DAF can also accept a variety of assets and convert them into cash for the receiving charity without tax consequences to the donor.
Keep in mind, every situation is unique, so before making any decisions, you should discuss your specific situation with your financial advisor and your tax advisor to ensure you are taking advantage of all available benefits. Lido Advisors utilizes experience, creativity, and independence to grow, maximize, and protect our clients’ assets and legacies. To discuss these and other charitable strategies, feel free to reach out to us today. We are happy to guide you in accomplishing all of your charitable goals.
