Year-End Charitable Planning: Give Simply & Give Smarter

Key Takeaways  

• It’s great to be charitably inclined, but some ways of giving are better than others. 

• Donate appreciated securities instead of cash to maximize tax savings.  

• Bunch donations in high-income years using a donor-advised fund to maximize deductions when needed most.  

• Complete charitable gifts by early December to ensure they're processed before year-end for tax deduction credit. Start planning now.    

One of the things I love most about living and working in the Princeton community is the strong culture of charitable giving. Many people I have met and work with donate their “time and treasure” toward causes they are passionate about. It’s very inspiring.   While many successful people have the resources and the desire to give, they don’t always go about it in the most efficient way. Here are some strategies that we utilize to assist our clients with supporting their favorite causes while doing so in the most tax-efficient way possible. 

 1. Donating Appreciated Securities Instead Of Cash

If you’re like many charitably inclined people, you automatically reach for your checkbook (or credit card) when it comes time to give. But in most cases, you’re better off giving appreciated stock or other assets instead of cash. For starters, if you are living on your savings, you won’t have to pay capital gains taxes on the appreciated gain of stock that you’re selling to raise the cash. This saves you anywhere from 15% to 23.8% depending on your federal tax bracket -- even more if you live in a high tax state. 

If you’re still working and saving, you don’t want to use your available cash for gifting. Instead, you can use that cash after you make your gift to buy and replace the stock you just donated. That way, you can maintain your position in a high-performing favorite stock, but now you have a stepped-up cost basis, which will save you further taxes down the road.   

2. Bunch Donations Into High-Income Years With A Donor-Advised Fund (DAF) 

Ideally, you want to make your largest charitable gifts in the years when your income and your effective tax rate are the highest. That’s when you’re going to get the most bang for your buck in terms of charitable deductions.  

For example, suppose you are retiring or changing jobs. You could be receiving a bonus and/or severance all in one lump sum. You might also be receiving a distribution from a non-qualified plan or deferred compensation plan that’s paying out in a lump sum as well. All this income could be hitting you in the same tax year, pushing you into a higher tax bracket. Meanwhile, your income the following year might be lower due to retirement. 

In this case, it makes sense to “bunch” donations into your donor-advised fund (DAF) in your highest tax year and then use the DAF to spread the distribution of those donations over several years when your income is lower.   If you’re not familiar with a DAF, it’s a charitable investment account that allows you to “park” your donated cash, securities, or other assets, and take an immediate deduction on those contributions but then distribute that money to charity over time instead of all at once.  

3. Use Qualified Charitable Distributions (QCDs) After Age 70.5, Not Just When You Start RMDs 

A qualified charitable distribution (QCD) is a direct transfer of funds from your IRA to a qualified charity, and the distribution is excluded from your gross income. Most people think you can only make a QCD when you start your required minimum distributions, typically at age 73 (or age 75, depending on the year you were born). What many people don't realize is that you can start making QCDs once you reach age 70.5. Doing so at age 70.5 is a good way to reduce the balance in your traditional IRA, and that helps reduce your future required distributions.  

4. Use DAFs For Family Meetings To Teach Philanthropy 

If you’re a parent or grandparent, you can contribute to a DAF on behalf of your children or grandchildren. At the end of the year (or whenever the extended family gets together), you can tell each of your children or grandchildren: “You get $1,000 to give to a charity of your choice. Come up with a name and tell us why.” It’s a great way to reinforce family values and the importance of giving. It’s also a fun way to learn more about your family and what is important to them. 

Another nice feature of a DAF is that you can set up “successor owners.” Here, you leave each of your grandkids a sum in the DAF and give them the responsibility for investing that money and gifting it over time. It’s another way to reinforce family values and your legacy. I’ve found that when children have a vested interest in where the money is going, they are more likely to stay engaged with charitable causes over their lifetime. 

Common Charitable Pitfalls To Avoid  

The timing of your gifting is very important. Gifts need to be completed by the end of the calendar year for them to count as a deduction in that tax year. Don’t wait until the last week of the year to make your gift!  We encourage our clients to start thinking about their giving in early November and try to have their gifting completed by the first week of December. We’ve seen people write checks to charities during the December Holidays, and the charities don’t cash the checks until well into the new year! If the check isn't cashed by the end of the calendar year -- especially QCDs out of an IRA -- you won’t get credit for it as a QCD, but you might also fail to satisfy the requirements for your RMD.    

Also, when donating stock, if you're transferring it from one custodian to another, things tend to be rather busy, as many people procrastinate. If you are gifting stock to a DAF and the stock isn’t deposited until after January 1^st, you won’t receive credit for the contribution until the following year. That can mess up your planning. 

Finally, if you are gifting non-cash items such as art or other collectibles to an organization or a DAF, it’s very important to have an appraisal. You are responsible for obtaining the appraisal, not the DAF. If you are gifting cryptocurrency, real estate, or shares of an LLC, you will need an appraisal to value those donated assets, so you’re covered in the event of an audit. 

Conclusion 

While many financial strategies can be employed to reduce your taxes, it all starts with having a clear idea about your charitable goals and how you want to see your money support your favorite causes. We identify the best strategy for our clients to use because we take the time to learn what is important to them about their money and what they want to accomplish in their lives. We also ensure the strategy is implemented in a timely manner and properly reported on their tax returns Contact me anytime if you’d like to review your year-end charitable planning.  

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RYAN M. VOGEL, CFP®, is the CHIEF PLANNING OFFICER, PARTNER at Novi Wealth