Any time you convert a traditional retirement savings account into a Roth, you will owe taxes on any pre-taxed amounts converted. Depending on the amount converted and your tax rate, the taxes on the Roth conversion can be significant. Converting in a year in which you can claim a large tax deduction, such as a charitable deduction, can be helpful in offsetting the conversion taxes and may give you an opportunity to give to a charity while also reducing your taxes.
Give appreciated securities, rather than cash
Donations made by cash or check are, by far, the most common methods of charitable giving. However, contributing stocks, bonds, or mutual funds that have appreciated over time has become increasingly popular in recent years, and for good reasons.
Most publicly traded securities with unrealized long‐term gains (meaning they were purchased more than a year ago and have increased in value) may be donated to a public charity, without the need to sell them first. When the donation is made, the donor can claim the fair market value as an itemized deduction on their federal tax return—up to 30% of the donor’s adjusted gross income (AGI). Other types of securities, such as restricted or privately traded securities and donations to nonpublic charities, may also be deductible, but additional requirements and limitations may apply.
When the securities are donated, no capital gains taxes are owed because the securities were donated, not sold. The greater the appreciation, the bigger the tax savings can be.
Consider establishing a donor-advised fund
A donor-advised fund (DAF) is a program of a public charity that allows donors to make contributions to the charity, become eligible to take an immediate tax deduction, and then make recommendations on their own timetable for distributing the funds to qualified charitable organizations. With charities that have DAF programs, you can make irrevocable contributions to the charity, which establishes a DAF on your behalf. There are a number of public charities, including that sponsor DAFs. You can then recommend grants to other eligible charities—generally speaking, IRS‐qualified 501(c)(3) public charities—from your DAF.
Establishing a DAF can be a particularly useful strategy at year‐end because it allows you to make a gift and take the tax deduction immediately but doesn’t require you to decide on the charities to support with grant recommendations. It can be a great way for charitably inclined individuals to offset a year with unexpectedly high earnings, or to pair with a Roth Conversion.
Consider a qualified charitable distribution (QCD) from an IRA
The qualified charitable distribution (QCD) option emerged after Hurricane Katrina in 2005 and was made permanent by Congress in 2015.
If you are at least age 70½, have an IRA, and plan to donate to charity this year, another consideration may be to make a QCD from your IRA. This action can satisfy charitable goals and allows funds to be withdrawn from an IRA without any tax consequences. A QCD can also be appealing because it can be used to satisfy your required minimum distribution (RMD).
Generally speaking, QCDs may be useful in situations where the charitable deduction could not be fully utilized—either because your itemized deductions (including the charitable contribution) fall below the threshold of the standard deduction in the first place, or because your charitable contribution is so large that it exceeds the 30% or 50% of AGI contribution limits and must be carried forward. QCDs may also be useful for high-income clients who are subject to phaseouts on their itemized deductions.
QCDs may be most appealing if you have few other deductions or if you are already close to your charitable deduction limitations. Because the tax-free QCD is never reported as a deduction it is not counted against the charitable limits.
Alternatively, if you are subject to an RMD and have a desire to contribute to a charity, you could take the RMD proceeds as a taxable distribution and use them to make a charitable donation. Your IRA distribution would then be reported as income, but the subsequent charitable contribution using the proceeds from the RMD would generally offset the tax consequences—to the extent that the limits and phaseouts allow it.
An important think to keep in mind is that you are not allowed to receive any benefit in return for your charitable donation. For example, if your donation covers your meal for a banquet or the cost of playing in a charitable golf tournament, your gift would not qualify as a QCD.
Charitable planning isn’t one-size-fits-all, so it is important to work closely with a wealth advisor and accountant to determine the best strategy for you. Contact our team today for more information on these strategies and how to get started!
The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the advisors at Sweet Financial and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investments mentioned may not be suitable for all investors. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. RMD’s are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.