Apr 28, 2017
By Kim Vine, CPA Partner at Terry Lockridge & Dunn
Giving cash is certainly the easiest way to fund your charitable inclinations. But for just a little more effort you could make that charitable donation do more for you. Here are a couple of popular strategies.
Appreciated securities – If you have owned a security (e.g., a stock or a mutual fund) for over a year, you could donate that to a charity and obtain a charitable deduction for the full market value of the asset, and at the same time, avoid paying taxes on the gain. The charity could then sell the asset and realize the full value.
IRA – If you are over age 70 ½, you can direct up to $100,000 per year be transferred directly from your IRA to charity. The amount being transferred can count toward your Required Minimum Distribution (RMD). By making the transfer directly from your IRA to charity, you avoid recognizing that IRA distribution as taxable income on your tax return. You do not receive a charitable deduction for this transfer but the benefit of being able to exclude the income can be well worth the trouble. This is especially true for taxpayers who either do not have enough deductions to itemize, or taxpayers for whom a taxable IRA distribution would increase the amount of their social security subject to tax. Many others can benefit as well because a taxable IRA distribution will increase your Adjusted Gross Income (AGI) which can cause further phase-out of various tax deductions and credits on your tax return. Note: this only makes sense to do with pre-tax (i.e., “traditional”) IRA’s. Do not use this strategy with your Roth IRA’s because those are not subject to income tax.
Effort involved for the above strategies: Contact your tax professional to verify the advantage of your proposed donation; then put your investment representative in touch with a representative from your charity and let the professionals take it from there. It is important to keep your tax professional in the loop so they can make sure the transfer is correctly reported as nontaxable on your income tax filings because the 1099-R you receive from your IRA custodian will not alert the preparer to this fact.
What about funding your charitable bequest at death? That is a different story. Under current tax law, when you die, assets held in a taxable account (i.e., assets not in a traditional IRA, qualified retirement plan, or annuity) will receive a “stepped up” basis equal to the value at your death. Thus, those appreciated securities which were a great asset to give to charity while you were living, are not a good choice for going to charity at your death. Instead, those securities held in taxable accounts are ideal assets to leave to your heirs because they can then sell those assets without realizing a taxable gain (due to that “stepped up” basis). Pre-tax assets (such as IRA’s, qualified employer retirement plans, and annuities) however, will be taxed as ordinary income as your heirs take distributions from those accounts. Thus, since charities do not pay income tax, it makes a lot of sense to fund your charitable bequests with the pre-tax accounts. As noted above, Roth IRA’s are not a good choice to fund charitable bequests because they are not subject to income tax; leave those for your heirs to enjoy continued tax-free growth.
There are several ways to direct your pre-tax accounts (such as an IRA) to charity at your death. One way is to name the charity as one of the beneficiaries of your IRA. The IRA beneficiary designation can state a certain dollar amount or a certain percentage as payable to the charity. Alternatively, you can create a separate IRA by transferring a portion of your existing IRA and then naming the charity as the sole beneficiary of that new IRA. A more complex arrangement involves naming your estate or revocable trust as the beneficiary of your IRA and then your Will or Revocable Trust document would identify the portion you want to be received by charity and the document would direct that pre-tax accounts be the first monies used to satisfy that bequest. This option requires careful drafting and is not as easily changed as simply naming your charity as a beneficiary on your IRA.
We hope these ideas get you thinking about more advantageous ways to fulfill your charitable intents. Our tax advisors are available to help you determine if these strategies make sense for you. You may contact Kim Vine at firstname.lastname@example.org to review your specific situation.