With the recent weather events of Harvey and Irma, it’s become much more evident that we all need a helping hand at times. Most people do not donate to charitable causes purely for the tax break, but if the government gives you a break, you might as well take advantage of it. Here are three tax efficient strategies to help others:
- Donor advised funds (DAF) – These are investment accounts (Vanguard, Schwab, Fidelity) you fund with deductible donations. Once in the account, you can invest the money in a mix of mutual funds to suit your risk tolerance. Donations can be then made to any 501(c)(3) organization with a few clicks of the mouse. You don’t need to send checks and the fund keeps a complete record of contributions and donations.
- Donating highly appreciated securities – This is one of my favorite techniques. If you own securities that have appreciated since you bought them (stocks, bonds, mutual funds, ETF’s), you can donate them directly to a charity and take a full deduction for the current value, even though you may have paid a lot less for them. The charity can then sell them at the current value tax free. For example, if you bought 100 shares of XYZ for $10 per share ($1,000) and they are now worth $50 per share ($5,000), you can donate them to the charity and take a deduction of $5,000 ($50 x 100) even though your cost basis was $1,000 ($10 x $100). The charity sells them for $5,000 tax free.
- Donating your required minimum distribution (RMD) to a charity – If you’re over 70 ½ years old, you are most likely required to take a minimum amount from your 401k or IRA so the IRA can collect taxes. If you send your RMD directly to a charity, the IRS allows you to do so without owing taxes on the distribution. The distribution needs to be made directly to the charity, but it can be a lot easier than taking your RMD, paying taxes on it, then donating cash to a charity followed by a deduction.
Be sure to check with your tax advisor regarding limitations and rules.
If you have any questions on these strategies, or any other financial planning topic, contact Randy Kratz, CFP® at firstname.lastname@example.org.