By RUSS HILL CFP®, AIFA®, CEO and Chairman | Halbert Hargrove Global Advisors LLC
If you’re reading this, then charitable giving matters to you. I applaud you.
I also want to point out that while you’re doing good, you can also do well. Here are four charitable giving tactics that could impact your own finances in a positive way. In short: tax efficiencies. These include front-loading your charitable giving with appreciated securities if you find yourself facing a high tax bill, as well as ways to get the most out of tax-deferred accounts like IRAs.
Depending on your own financial situation, several of these moves may make a welcome difference to your tax bill this tax year, down the road or both. The point is, you can potentially make use of these strategies when the timing is right for you.
There are many scenarios under which holding onto highly appreciated blocks of stock, mutual funds or bonds may no longer make sense for your investment strategy. It could simply be a matter of rebalancing: A holding might take up significant acreage in your portfolio, exposing you to a risk that needs to be diversified. Or the valuation of a security may have entered into what your discipline considers “sell” territory. And so on.
Whatever your reasons for selling, if you want to avoid a capital gains tax hit, one of your simplest options is to donate those appreciated securities to charity. IRS rules allow you to directly donate securities and deduct their full appreciated value if they have been held for one year or more. When you donate them, the tax you would have had to pay on the gain goes away. And the charitable organization gets the full benefit of your donation.
For the 2016 tax year, these capital gains taxes can range from 15% to 23.8% for high-income earners. If you’re in the 25%-35% federal income tax bracket, for example, you’d pay 15% on those gains. If you’re among the highest-income earners (individuals earning $415,000 or above and joint filers earning $466,950 or more) you’d have to pay a capital gains tax of 20%, plus the 3.8% Medicare surtax, for a total of 23.8%.
Keep in mind that tax write-offs for donations of stock and other appreciated assets are limited to 30% of your adjusted gross income (AGI) for each tax year. But you can always donate more than 30% of appreciated assets in any given year. Any amount above that 30% of AGI can be carried forward for up to five years and applied as a tax offset against your future federal income taxes. With cash donations, you can write off up to 50% of AGI each year.
If you’re planning to convert your traditional IRA to a Roth IRA, consider offsetting some of the taxes thrown off by the conversion by donating appreciated securities.
Unlike traditional IRAs, contributions to a Roth IRA are not tax deductible. Thus, if you’re doing a Roth conversion, you’d need to pay taxes on all assets transferred to this vehicle. Charitable contributions such as appreciated securities made in the same year as the Roth conversion can reduce your tax liability, while also making an impact on charities that matter to you.
Roth IRAs present a number of great advantages for retirees. Not least, they have fewer withdrawal restrictions than IRAs, and they do not have required minimum distributions (RMDs). And if you don’t need the money in your Roth IRA to support your retirement, you can keep accumulating income there tax-free. This makes them a great bequest vehicle for family members &mdash although the beneficiaries who’d inherit your Roth would face minimum distribution rules.
This charitable tax-offset strategy will serve you most advantageously if: a) you already plan to make a significant gift to charity in the year you intend to do the Roth conversion, and b) you have adequate non-retirement funds to pay for the tax costs of the conversion.
We’re back to those pesky RMDs for non-Roth IRAs. This approach is for those of you older than 70½ who enjoy giving back to your community and who don’t need the income from your traditional IRAs to support your retirement.
If this sounds like you, why not consider giving those funds to your favored charities? You won’t have to pay taxes on those distributions &mdash like you would if you kept those assets. And again, it would represent a win for the recipients of your philanthropy.
Donor-advised funds (DAFs) are a great vehicle for front-loading charitable contributions under the scenario I described in #1. Perhaps you had a very good year in the markets and want to donate a lot of appreciated stock &mdash whose gains may represent more than 30% of your AGI. DAFs provide an IRS-sanctioned vehicle for holding some of those funds if you’re not yet ready to distribute all of the assets to charities.
There are no minimum requirements for distributing these charitable gifts from a DAF. If, for example, you foresee being on a more limited income soon, a front-loaded DAF could enable you to continue your generous gifting down the road in retirement, even if you need to keep a more careful eye on outflows.
Two final observations: It always makes sense to consult with your tax adviser when contemplating tax-advantaged strategies. And finally: In 2015, individuals in the U.S. contributed $264.58 billion to charities, far outstripping donations by foundations and corporations. That’s a number we should all be proud of.
Russ Hill CFP®, AIFA® is CEO and Chairman of Halbert Hargrove, based in Long Beach, CA. Russ specializes in investing, financial planning and longevity-awareness solutions.