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5 Smart Charitable Giving Strategies This Holiday Season

| December 15, 2022
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5 Smart Charitable Giving Strategies This Holiday Season


The past year has been especially challenging for most investors.

Even so, there are those who choose to remain faithful to the causes that are important to them. It is also a time when churches and non-profits might be experiencing urgent needs.

The following 5 smart charitable giving strategies are taken from a recent article by Michael Musak of Avantax and highlight tax benefits that might be helpful in support of your philanthropic pursuits.


1. Select the Right Asset To Give

How it works: Consider a donation of long-term appreciated stock (i.e., held for greater than one year) to charity via a donor-advised fund in lieu of cash. May work well for: Investors with long-term appreciated stock where the current value is significantly higher than when it was purchased. Potential benefits: Tax benefits may include a tax deduction for the fair market value of the contribution and elimination of the capital gains tax and Medicare surtax that is otherwise incurred on the sale of the stock. This assumes all realized gains are subject to the maximum federal long-term capital gain tax rate of 20% and the potential of Medicare surtax of 3.8%. This does not account for state or local taxes, if any.

2. When Rebalancing a Portfolio, Consider Donating Appreciated Positions

How it works: Rather than selling appreciated positions to rebalance a portfolio, an investor can make a charitable gift of the long-term appreciated asset via a donor-advised fund. May work well for: Portfolios that have become increasingly exposed to stock market corrections or fallen out of alignment with investment goals. Potential benefits: Investors may be eligible to take a tax deduction for the fair market value of the asset and eliminate the capital gain tax and Medicare surtax.

3. Divest Privately Held Interests via a Donor-Advised Fund

How it works: Donate a portion or all non-publicly traded held interests to a charity prior to divestiture. Note that timing is important as the donation must occur before the sale of the asset and the donor needs a third-party independent valuation.

May work well for: Portfolios that hold a family business, S corporation shares, or cryptocurrency, restricted stock, and some alternative investments. Potential benefits: Not only is it possible to minimize capital gains exposure under this strategy, but it also may allow for a tax deduction for the current fair market value of the donated assets, rather than the original cost basis a private foundation must use.

4. Elect Charitable Contributions to Offset a High-Income Year

How it works: A “bunching” strategy may reduce taxable income. By frontloading multiple years of charitable giving in one year, you may be able to bypass the itemization threshold and then elect the standard deduction in subsequent years. May work well for: Those on the threshold of a higher tax bracket or with higher income than expected in the future, especially for a unique event (e.g., a financial windfall or work bonus) that is not anticipated to repeat. Potential benefits: This strategy can reduce taxable income in a given calendar year. When paired with a donor-advised fund, it establishes a charitable “nest egg” that can grow tax-free and support giving now and in the future.

5. During Roth Conversions, Offset Increased Taxable Income With a Charitable Contribution

How it works: When a Roth conversion triggers a taxable event, a charitable gift in the same tax year may offset taxable income. May work well for: This approach is well suited for those with long investment timelines (over five years) and those who expect higher taxes in the future. (Keep in mind if you are considering making a qualified charitable distribution (QCD) from an IRA account, remember some charities are not eligible recipients. This includes donor-advised funds, private foundations and supporting organizations as described in IRC Section 509(a)(3).) Also those who have inherited an IRA and must withdraw the assets within 10 years of the death of the original account holder. Potential benefits: The charitable deduction can offset the increase in taxable income triggered by the conversion.

Visit www.journeybeyondself.com “ask a question” if you would like more information about these or other strategies that could result in tax savings.

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