By Jonathan Freeman, CFP®, CFA, CIMA®
As the season of both gratitude and giving approaches, many of us feel particularly grateful to be in a position to offer assistance to our neighbors during hard times. You may not realize that those things you do out of the kindness of your heart may also make you eligible to receive tax advantages.
Not everyone qualifies for such benefits. With a larger standard deduction and limited state and local tax deductions available, most people are not itemizing their deductions even if they give several thousand dollars to charity. The current maximum state and local tax deduction remains at $10,000, subject to change with pending legislation. Most people without large deductible mortgage interest expenses or medical expenses, which need to exceed 7.5% of adjusted gross income (AGI) to be included, do not reap the tax benefits from charitable deductions.
For example, a married couple, both over the age of 65, has a $27,800 standard deduction. If they maximize their state and local deduction at $10,000, have no mortgage interest, and their medical expenses are lower than 7.5% of their AGI, they would need to donate over $17,800 to charity before being able to itemize their deductions and receive tax benefits. There is some exception, in that individuals can claim a $300 deduction for cash contributions, and married individuals filing joint returns can claim $600.
Of course, the spirit of giving is about more than taxes, but deductions certainly help, and there are a couple of ways around this issue.
First, people over 70½ years of age may utilize Qualified Charitable Distributions (QCDs). A QCD is a direct transfer of funds to a charity from your IRA. The maximum annual limit for these distributions is $100,000, and if you are over the age of 72, they do count toward your required minimum distribution.
As long as the charity is a 501(c)(3) organization, the distributions will not be considered taxable income and will not be included in your adjusted gross income. This may also be a benefit as your AGI can impact Medicare B and D premiums. It is important to note that gifts to private foundations, supporting organizations and donor-advised funds are not considered QCDs.
Finally, the 1099R will not specify the amount that is a charitable donation, so you will need to keep receipts, as with other charitable donations.
For people under the age of 70½ who regularly donate to charity, you may want to consider a donor-advised fund. This can be funded with cash or securities.
In general, our preference is to donate low-cost basis shares of stock that have been held for at least one year. If the shares have not been held for one year, the deductible amount is the cost basis or the fair market value, whichever is lower. The deduction can be up to 30% of your adjusted gross income. If you exceed this, the deduction can be carried forward for five years.
A donor-advised fund allows the donor to receive a large tax deduction during the year of the gift while using the fund over time for future charitable giving. As an example, if a couple filing a joint return tends to gift $10,000 per year to charity and has no mortgage interest deduction, they are unlikely to itemize their deductions and benefit from these gifts.
If they earn $200,000 per year, they may want to consider a gift of $60,000 in low-basis stock to fund six years of giving. This way, most of the gift will be itemized on their return in the first year, and they can use the donor-advised fund during subsequent years while taking their standard deduction.
If you would like to discuss this or other charitable giving ideas, please get in touch with Stonebridge Financial Group through our online contact form, or you can call us at 717-736-7007.
As one of the Directors of Stonebridge Financial Group, Jonathan’s goal is to help lead an organization that strives to provide the highest degree of client service, integrity, and professionalism. With disciplined investment strategies that emphasize risk-adjusted returns, cost, and tax efficiency, his objective is to help the individuals, families, corporations, and nonprofit organizations that he works with to achieve their financial goals.