At this time of year, many people demonstrate their generosity through charitable giving. For some, annual giving is a chance to support causes with which they have longstanding relationships. Others give to a rotating platform of recipients, responding to in-the-moment issues. Some choose to include family of all ages, making giving an activity that unites generations.
As you approach your philanthropic life, selecting one-or several-charities and deciding on the amount you'd like to give are essential first steps. Giving is an important tool to express your views and values, and it's vital to weigh the strength, integrity and future of the causes you fund. However, it's equally important to consider how you give, as well as the type of charitable organization receiving your gift, to maximize your gift and minimize its impact on your overall finances.
Cash contributions have limitations.
While cash and checks are popular and simple ways to give, long-term appreciated assets-including stocks, bonds or mutual funds-may offer better tax benefits to you, particularly for contributions of significant size and for distinct types of organizations.
For instance, subject to certain restrictions, if you contribute stock or certain other assets held for over a year to either a private foundation or a public charity (including donor-advised funds), you can generally deduct the stock's full fair-market value on your federal income tax returns. The amount you deduct can be up to 30% of your adjusted gross income (AGI) for gifts to a public charity; for gifts to a private foundation, you can deduct up to 20% of your AGI. Any unused deduction can be carried forward for five years.
Say you want to donate $50,000 to a favorite charity. The table below shows three avenues of contribution-cash, net proceeds from selling appreciated stock and appreciated stock. As you can see, donating appreciated stock has a benefit that does not apply to either cash donations or proceeds from the sale of appreciated stock-you completely avoid paying capital gains tax on the appreciation.
Example 1: Pathways to a $50,000 contribution.
|Contribution: Cash||Contribution: Net proceeds of stock sale||Contribution: Appreciated stock|
|Cost basis||$50,000||$20,000 ($30,000 appreciation)||$20,000 ($30,000 appreciation)|
|Tax implication1||-||(-)$9,000 on sale||(+)$9,000 avoided|
|Value of gift/tax deductible amount2||$50,000||$41,000||$50,000|
|Net benefit||$50,000 x tax rate||$41,000 x tax rate||$50,000 x tax rate + $9,000|
1Assuming 30% combined federal and state tax rate
2Subject to AGI limitations
This chart is for illustrative purposes only.
What type of charity are you benefitting?
The type of charity to which you are donating might also affect how you structure your giving. Each year, the tax deductible amount of a charitable gift is capped as a percentage of your AGI. That percentage is higher for gifts to public charities and donor-advised funds than for gifts to private foundations. And it is higher for gifts of cash than gifts of non-cash assets. As a result, depending on (i) the size of your gift, (ii) how much you expect to deduct against your income taxes and (iii) the types of charities you want to support, you may decide to give non-cash assets (like appreciated stock), cash assets or a combination of both.
Over 72? Consider giving directly from an IRA.
If you are 70½ or older and have an IRA, you can make a direct transfer of up to $100,000 each year from your IRA to qualified charities, and you can apply that donation toward your required minimum distribution (RMD) for the year. However, currently, minimum distributions aren't required until you are over 72 years old. For such transfers, private foundations, donor-advised funds and supporting organizations are not considered qualified charities.
Since a direct contribution from an IRA is not included in your taxable income for the year, this approach helps minimize your income and reduces the chance that your tax bracket will go higher. Additionally, because these distributions aren't considered income, they are exempt from charitable gift limits (but you also can't take a deduction for them). If you don't need RMD income, consider thoughtful use of your IRA to fulfill at least some of your charitable goals.
Tax efficiency matters in legacy giving too.
As you think about your philanthropic goals for 2021, use this opportunity to begin shaping-or revisiting-your legacy planning. Many of the gift-optimizing strategies for single-year giving are factors in long-term philanthropic planning as well. For example, retirement assets-including 401(k)s or traditional IRAs-may be the most efficient way to create a charitable legacy. Of course, you will want to connect with a tax or financial advisor to assess your specific situation before making any major moves.
J.P. Morgan can help you amplify your generosity.
As a lens on giving in these challenging times, the J.P. Morgan Charitable Gift Fund saw significant increases in giving during 2020: contribution amounts increased by more than 47% and the number of recipients increased over 20%, expanding to food banks, community foundations and other organizations focused on public and societal needs. We are proud to serve clients who are passionate about their charitable giving-and their ability to make a difference.
To learn more about how you can maximize your giving to causes that matter the most to you, reach out to your J.P. Morgan team. Working with your tax advisor, they can help you create a plan for your 2021 giving that meets both your philanthropic wishes as well as your tax planning goals.