Financial markets have appreciated over the past several years leaving investors with some significant gains in their taxable investment accounts. An investor who is charitably inclined and has assets with unrealized capital appreciation may want to consider using these assets to make charitable gifts instead of using cash. Assuming that the individual stays within the annual charitable gifting limitations (IRS Publication 526), the fair market value of stock, mutual fund or ETF gift is deducted on Schedule A as a charitable deduction. The unrealized gain is not recognized on the tax return as income, thereby going untaxed. For example, if you own Security X in your portfolio with a fair market value of $25,000 and a cost basis of $10,000, you could sell it, pay the income tax due on the $15,000 gain, and give charity the after-tax proceeds, or you could just gift the security. If the charity sells the security for $25,000, it gets to keep all $25,000. In the cash example, the contribution on schedule A, itemized deductions, is the net gift after taxes. In the security example, the charitable contribution is $25,000. Note, the charity must be able to accept a gift of stock, mutual fund or ETF shares, so check with the charity first. Also, due to the charitable deduction limitations on gifts of appreciated property, coupled with the phase-out rules that apply to itemized deductions, you should consult your tax advisor prior to making any decision.
The Consolidated Appropriations Act of 2016
There is one other gifting strategy that is only available to individuals 70.5 and older that should not be overlooked. The Consolidated Appropriations Act of 2016 made permanent qualified charitable distributions (QCDs) from individual retirement plans (IRAs). This method of gifting is limited to individuals who have attained the age of 70.5 and cannot exceed $100,000 annually. For individuals who have the ability to make these gifts, it can prove to be tax advantageous. First, the QCD can be used to satisfy the required minimum distribution in the year it was made. For example, if you need to take a $50,000 RMD in 2016, instead of taking the funds for yourself, you can contribute them directly to a qualifying charity (private foundations and donor-advised funds do not qualify). The $50,000 does not show up on your tax return as taxable income in 2016. Although you do not receive a schedule A charitable deduction, you do receive some benefits by not including the distribution in taxable income. Here are two possible benefits: (1) If your IRA distributions are causing your Social Security benefits to be taxed, this technique will remove the offending income and (2) lowering your adjusted gross income (AGI) may allow you to avoid some or all of the phase out limitations for personal exemptions, medical expenses, miscellaneous (2%) itemized deduction or the overall phase-out of itemized deductions. Note, have your tax advisor calculate a side-by-side illustration to determine the projected benefits.