First, there's investment appreciation: If you're reading this, it's a good bet that you have money in stocks, which have enjoyed a terrific run so far this year. The S&P 500 has gained about 17% through mid-November, and high-growth pockets of the market have gained even more. International equities have been on a tear. If you're planning to rebalance your portfolio--trim winning positions and add to your laggards--steering some of those trimmings to charity can help you enable you to earn a tax break, reduce the risk in your investment portfolio, and
do some good.
And while the details on tax reform are far from final, both the House and Senate tax bill would increase the standard deduction. That, in turn, could make charitable giving less advantageous in the future than it is today, at least from a tax standpoint. That's because for many tax filers, the standard deduction would likely be greater, in many instances, than itemizing deductions.
If you're retired, you have a few additional reasons to consider charitable giving as the year winds down, and consider involving your portfolio, too. First, retirees generally need to be more risk-averse than young accumulators; eight-plus years into the current bull market, their portfolios could be more aggressive than they should be. In addition, retirees who are taking distributions from their IRAs can take advantage of the qualified charitable distribution, enabling them to transfer charitable contributions out of their IRAs tax-free.
Here are some of the key charitable giving strategies that retirees should consider before year-end. Note that they're not mutually exclusive (executing a qualified charitable distribution doesn't disqualify you from also donating appreciated securities from your taxable account). If you're working with a financial advisor and/or tax advisor, they should be able to advise you on which of these strategies makes sense for your plan. Charitably inclined people with a large amount of assets may also want to consider additional strategies not included in this article, such as charitable remainder trusts
Take Advantage of Qualified Charitable Distributions
Investors older than age 70 1/2 who are taking required minimum distributions from their traditional IRAs can steer a portion of their distributions--up to $100,000--directly to the qualified charities of their choice, thereby satisfying the required minimum distribution requirements. This strategy can be more beneficial than taking money out of the IRA, writing a check to charity, and deducting it on your tax return. That's because the QCD amount, in contrast with an RMD that you spend or reinvest, doesn't inflate your adjusted gross income. That can help keep you out of a higher tax bracket, qualify you for credits and deductions that you might not be eligible for with a higher adjusted gross income, and reduce the amount of your Social Security income that's taxable.
If you're planning to use the QCD, take the opportunity to improve your portfolio at the same time. If you have holdings that have grown too large or that you believe to be overvalued, concentrate on selling those shares to meet RMDs/QCDs (looking at you, high-growth stocks and funds).
Consider Donating Appreciated Stock
The QCD applies to IRA assets for people who are post-age 70 12. But what if you have appreciated holdings outside of your IRA, and/or aren't yet taking RMDs? In that instance, take a closer look at your non-retirement/taxable holdings. For example, perhaps you've run an X-ray on your portfolio and determined that you have way too much riding on the tech sector and the whole growth side of the style box, thanks largely to a large-growth fund that has skyrocketed in value. You could donate all or a chunk of the fund to charity. Giving appreciated securities to charity also has the benefit of removing those assets from taxation: You, the donor, won't owe capital gains taxes on the appreciation in the shares, and you can also deduct the full market value of the shares at the time of the donation, provided you've owned them for at least one year and provided the deduction is less than 30% of adjusted gross income. If the amount of donation exceeds what's deductible in a given year, any excess can be carried forward and deducted for up to five years in the future.
Employ a Donor-Advised Fund
Morningstar's head of rebalancing solutions has called donor-advised funds a "super-charged" charitable-giving strategy. Here's how they work: The donor contributes cash or investment assets to the fund, which is a charity in the eyes of the IRS, thereby obtaining an immediate tax deduction on the amount contributed. (If the donor contributes cash, he or she can take a deduction of up to 50% of adjusted gross income; if the donor contributes securities, the deduction is limited to 30% of adjusted gross income.) The donor can then direct contributions from the donor-advised fund to various charities over time, and can also contribute additional monies to the donor-advised fund. The donor is also in charge of how the money is invested; most donor-advised funds feature a short menu of investment options ranging from very conservative (for monies that will be disbursed soon) to more aggressive (for assets that will be distributed to charity further in the future). Morningstar's Karen Wallace has just finished a series of articles on Vanguard, Fidelity, and Schwab.
The reason the donor can take the tax deduction right out of the box is that the contributions are irrevocable, even though the amount isn't necessarily being disbursed straightaway. As with donating appreciated securities directly to a charity, investors can steer highly appreciated assets into the donor-advised fund, thereby removing the tax burden associated with the embedded capital gain from their portfolios. (The charity does the selling, not the investor.) This article
does a deeper dive into the pros and cons of donor-advised funds.
Donor-advised funds are particularly appropriate if you find yourself in a particularly high-income year and/or if your portfolio includes nonpublicly traded assets, like stock of private companies. Many charities can handle donations of publicly traded securities, as in the maneuver outlined above; the charity can simply liquidate the position in the open market and direct the proceeds back into the charity. But most charities are not equipped to deal with nonpublic assets; donor-advised fund administrators have more experience with assets such as restricted stock and ownership stakes in nonpublic companies. Donating nonpublic assets to a donor-advised fund can also simplify the administration of a donor's estate, in that heirs won't be required to find a buyer for those assets, while removing those highly idiosyncratic, often highly risky, assets from the investor's portfolio.
Add Charities to Beneficiary Designations
Perhaps you're charitably inclined but are still worried about the sustainability of your assets and need your portfolio distributions for living expenses. If that's the case, take a closer look at your beneficiary designations. (Revisiting them should be part of your year-end portfolio checkup no matter what.) Making a charity a beneficiary or partial beneficiary of your accounts won't help you obtain any sort of tax break for the 2017 tax year. However, upon your death the charity will receive the assets tax-free, and your estate will also be eligible for a charitable deduction. By contrast, if you name children or other heirs as the beneficiary of an IRA, they'll pay taxes when they take withdrawals from the account (unless it's a Roth IRA). If you'd like part of your IRA assets to go to charity and part to your spouse or children, consider splitting your IRA into separate IRA accounts, each with its own beneficiary designation. The advantage of this approach is that distributions from IRA accounts with named beneficiaries (humans) can be stretched out over a longer period than distributions of IRA assets that are earmarked for charity.