Many of our clients like to make gifts to charity. But what’s the best way to do so given all the recent changes in tax rules?
The Journal of Financial Planning just published a research paper comparing some of the top options, like gifting assets that have gone up in value, giving directly from your IRA using a Qualified Charitable Distribution (QCD), or giving by check or credit card.
You may not want to churn through the whole article and all the calculations, so here’s a quick summary of the findings.
In most cases, giving directly from your IRA account using a Qualified Charitable Distribution (QCD) will give you the most bang for your buck. Over the past couple years, we’ve helped a growing number of clients make these IRA gifts to charity, and they wholeheartedly appreciate the tax benefits. By using IRA money to make charitable gifts, you reduce your taxable income, cut your tax bill and help keep Medicare premiums down as well. It’s a no-brainer.
In the article, researchers concluded that “for taxpayers who do not itemize deductions, qualified charitable distributions save more tax than donating appreciated securities.”
Even for taxpayers who do itemize, a QCD can save more on taxes, compared to other techniques, if the individual is in a low capital gains bracket.
On the other hand, if you’re in a higher capital gains tax bracket, and you itemize deductions, you can probably land the biggest tax savings by gifting appreciated securities to your favorite charity or donor advised fund. Appreciated securities are those that have gone up in value since you bought them. If you sold them, you would have to pay capital gains taxes, but if you gift them to a charity, you’ll get a sizable deduction, and the charity can sell the securities free of tax. That helps your gift make the biggest impact.
The Takeaway: Recent tax reforms have reordered the charitable landscape. You can still get great tax advantages and make an impact through your charitable gifts, but the best way to actually make the gift may have changed, in light of new tax rules. So before you write that check to charity, talk to your wealth advisor for timely tax tips that can save you even more money and make your gift go farther.