Fall into Charitable Gifting Season

Note: This is an updated version of an article originally published on September 30, 2019. It has been updated to incorporate changes made in 2020 to the rules governing required minimum distributions (RMD).

As portfolio managers, we have slightly different seasonal associations than most people. Spring is not just about crocuses and maple syrup; it’s also about getting out tax reports, raising cash for tax payments, and rebalancing portfolios. Summer lends itself to quiet markets (usually) and time to add new names to our buy list, do a full social analysis of our holdings, and start our annual compliance review. And autumn’s pumpkin spice and apple cider mean we are thinking about gifting and tax planning.

For clients, fall is the time to get in touch with both your accountant and portfolio manager to see if gifting stock would be advisable for your taxes. As we have all seen, the Tax Cuts & Jobs Act of 2017 changed people’s tax pictures. For many, the increased personal deduction made it less attractive for individuals and couples to itemize their taxes and thus get charitable gifting deductions. Even without the charitable deduction, charitable gifting can still be beneficial. Here are a few gifting opportunities that should be considered:

• Donating appreciated stock: No matter your tax situation, if you plan to gift to qualified charities, it is worth considering the gift of stock. Even if you will not be itemizing, if you make annual donations that are over $1,000 to a single charity, giving appreciated and overvalued stock allows you to avoid realizing taxable gains, lock in that higher market value, and rebalance risk in your portfolio. In addition, if you are itemizing, you will get the deduction benefit of the current market value of that stock.[1] Clean Yield is happy to help facilitate this type of transaction.

• Donating your required minimum distribution: In the past, those 70½ or older with an IRA, needed to take a required minimum distribution (RMD) every year. Those who did not need that distribution for living expenses, could choose to donate part or all of that distribution (up to $100,000) directly to charity through a qualified charitable contribution (QCD). RMDs are taxable as income, but the QCD, or the donated part of your RMD, does not count toward your income that year. However, RMDs have been suspended for 2020 – no one is required to make a distribution this year (though you are certainly allowed to if desired). The age for RMDs has also been increased to 72 for anyone who would have started RMDs in 2020. This year it probably makes sense to make a donation from appreciated stock in a taxable account instead of your IRA.

• Bunching donations: Under the new tax law, you may be right on the edge of when itemizing makes sense. If so, it may be worth considering bunching several years of donations into one year, particularly while the stock market is overvalued. This would make one year’s donations larger, and thus the deduction from the donation would be more than the standard deduction. For instance, you can plan to make several donations of $10,000 worth of stock in 2020 (and itemize for that tax year) and then hold off from donations in 2021 and 2022 (take the standard deduction those tax years). You just need to be ready to say no to charities in the planned no-giving years!

• Donor-Advised Fund (DAF): Many community foundations and custodians offer donor-advised funds. Accounts usually start with $5,000 or more. DAFs are particularly helpful if you plan to donate a larger sum from a taxable account in one year (see bunching above) but don’t know exactly where you want to give, want to spread it out to a number of charities, or are giving to charities that may have administrative limitations on receiving direct stock donations. You donate stock to the DAF and then direct the fund sponsor to make cash contributions to charities of your choice; they take it from there. Or you can donate to the DAF and then pick from their menu of charitable giving options. The funds do not all have to be distributed to charities in that year, but you claim the tax benefit in the year the stock is donated to the DAF. All of these services come with a fee, so it is worth comparing these fees, as well as how the money in the DAF is managed, before choosing a fund. Some but not all donor-advised fund sponsors offer socially responsible investing options.

We are here to help! With the leaves changing around us, all of the above are on our minds, and we are ready to get you set up with whatever types of donations would work best (and, of course, are happy to do so all year ‘round). Your accountant can advise on which option(s) might be best for your tax situation, and we can explain the effects on your portfolio, choose the best stocks to donate, and do the paperwork for your signature. Our one request: Please let us know as soon as possible! We cannot guarantee that donation requests made after December 15 will be processed before the end of the year, though we will do our best.

Just remember every year, foliage means it is time to talk to your accountant and portfolio manager about your charitable giving options.

[1] Limitations on stock donations include that the stock must be held for at least one year and the deduction is no more than 30% of your adjusted gross income (AGI).