How to magnify the impact of your charitable giving

Steve Merrell |

There are few things more rewarding than knowing you are contributing your time and money to further a worthy cause. In fact, one of the most gratifying aspects of my career has been watching people catch the vision of philanthropy. Whether you have been giving to charities for years or are just starting to think about it, here are three ideas that will help magnify the impact of your giving for both the charity and you.

Idea #1: Donate appreciated stock. I know a person who donates one-tenth of his income to his church every year. Several years ago, he discovered that he could make a gift of appreciated stock instead of cash. We sifted through his portfolio looking for the investments with the largest unrealized capital gains. As we tallied his positions, we soon found enough shares to cover his tithing. He donated the shares to the church and used the cash he would have donated to buy replacement shares in the market. Donating appreciated shares allowed him to avoid taxes on large capital gains. By replacing the donated shares, he kept his portfolio invested and effectively stepped-up his cost basis in those stocks to the current market.

You can gift stock and mutual fund shares to any bona fide charity, but you need to remember a couple of very important rules. First, in order to get a tax deduction for the full market value of the donated shares, you must have held them for at least one year. If you donate stock held less than a year, you will only be able to deduct your cost basis. Second, only donate appreciated stock. If you have stock that has gone down in value, you are better off selling the stock, realizing the tax loss and then donating the cash to charity.

Idea #2: I As you do your estate planning, be careful as you select which accounts you leave to charity. Since charities do not pay taxes, some types of accounts are more valuable to them than they are to tax-paying beneficiaries. Here’s why.

When a person inherits a traditional IRA (or any tax-deferred retirement account), she also inherits a tax liability. As soon as she withdraws money from the IRA, part of that money is lost to state and federal income tax. However, since charities have no tax liability, they get to keep every dollar they receive, including from a traditional IRA.

On the other hand, an individual is usually much better of inheriting taxable assets. When an individual inherits taxable assets, those assets often benefit from a step-up in the asset’s cost basis. With the stepped-up basis, all the embedded capital gains are washed out of the taxable portfolio and the beneficiary faces no tax liability.

In many cases, the tax advantage for charities is magnified by the recent passage of the SECURE Act. Under the new law, inherited IRAs must be fully distributed by the tenth anniversary of the year in which the decedent passes away. This shorter distribution period raises the effective tax cost to most individuals who inherit traditional IRAs.

Note that this logic doesn’t hold for Roth accounts. Since all withdrawals from Roth IRAs and 401(k) plans are tax-free, it doesn’t matter whether those assets are inherited by a charity or a tax-paying individual.

Idea #3: Consider a QCD. If you are interested in giving to charity and are already taking required minimum distributions from your retirement accounts, you should consider make a qualified charitable distribution, or QCD. The QCD allows you to make the donation to charity directly from your IRA without having to recognize the distribution as part of your adjusted gross income. By keeping it out of your AGI, you may be able to stay in a lower tax bracket, reduce the taxation of Social Security income and maintain your eligibility for other tax benefits that you might otherwise lose. QCDs must follow strict rules to qualify, so it helps to work with a knowledgeable financial advisor.



Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to: