Contributing stock or other assets that have gained value often delivers more to a philanthropic organization than writing a check.
“People give to charity because they’re passionate about a cause or an organization,” says Jeff Winick, Senior Wealth Strategist for Regions Private Wealth Management. But cash isn’t your only option if you’re interested in philanthropy.
Giving assets other than cash can stretch the donation’s value. “Cash can be the least tax-efficient method of supporting a charity,” Winick says.
When you donate appreciated assets — artwork, other collectibles, securities, an interest in real estate or, in some instances, certain business interests — instead of cash, the charitable organization reaps the benefit of any increase in value over what you paid for it, and that extra value isn’t diluted by taxes.
Say you bought a painting for $100 that is now worth $1,000. If you sold the painting in order to donate cash to a charity, you’d pay taxes on the $900 capital gain. Your total donation would be less than $1,000. However, if you donated the painting itself to the charity, it would receive a donation valued at $1,000, and you would avoid paying capital gains taxes on the painting’s $900 appreciation.
That’s why it’s good to be tax efficient: Every dollar that doesn’t go toward taxes is a dollar that can support your favorite cause.
On top of that, you can generally deduct the current market value of such a gift, though the IRS imposes some limits if the donation exceeds a certain percentage of your adjusted gross income. The IRS offers explanations and resources to help you figure out if your donation qualifies.
Designating a charity or nonprofit as the beneficiary of your individual retirement accounts — IRA, 401(k), or other tax-deferred retirement account — can also boost your philanthropic impact. “If you’re looking to make a $250,000 gift to your alma mater as part of your estate plan, having it come from a 401(k) plan can be the best use of the account,” says Winick because neither the estate nor the school will face income tax liability.
The federal government also recently made it easier to tap a traditional IRA to support qualified charities. If you’ve reached age 70½ and must begin taking required minimum distributions each year from your IRA, you can have the IRA transfer money directly to a charity to satisfy that distribution, known as a qualified charitable distribution. There are certain restrictions and conditions around these donations, so check with the IRS or a tax professional for the most up-to-date information.
Finally, you might also consider a charitable remainder trust. These trusts can provide both an income stream to you during your lifetime, and a benefit to the charity upon your death. You can also swap that and have income from the trust go to the charity and the remainder to your beneficiaries.
