Tax-smart giving: Qualified charitable distributions & gifting stock

Just as with other aspects of your financial life, your charitable giving should be built around a strategy. A clear objective for most is to find ways to maximize the impact of your charitable donations. While your primary desire may be to support your favorite charitable organizations, you also want to be sure to fully capitalize on the tax benefits available to you.

The best gifting approach is not to make donations on a whim, but to put more thought into the process. Cash gifts tend to be the default option for many, but they may not be the most efficient use of your charitable generosity. This is true both in the net amount extended to a charity and the tax benefits you can achieve through tax-deductible donations.

If you own highly appreciated stock in a taxable account or have built significant sums in a traditional IRA and are at least age 70 ½, there may be more efficient gifting options available to you. In addition to private foundations or donor-advised funds, you may want to consider these advanced giving strategies as part of your comprehensive wealth plan.

Gifting appreciated closely-held securities and other assets

If you own shares of stock that have experienced significant price appreciation, based on current tax laws, as long as that stock is held, it can continue to appreciate in value with no tax consequences. Capital gains taxes are due when the stock is sold, taxed at a rate of up to 20% (on securities held for more than one year) at the federal level. In addition, if your modified adjusted gross income exceeds certain threshold amounts, a 3.8% net investment income tax (NIIT) may also apply.

If you have intentions to sell stock with a low cost basis, one alternative to consider is gifting those securities to charity. This offers important advantages compared to first selling the securities and then making a cash donation.

As an example, let’s say you planned to make a $100,000 gift to charity. If you were going to liquidate a stock position to make that donation, you might have to sell $125,000 worth of stock to cover the long-term capital gains tax impact of the sale. If 3.8% NIIT applies, you would need to sell $131,234 to cover both capital gains and NIIT. State taxes may apply on top of that.

A better strategy may be to donate $100,000 worth of stock directly to a charitable organization. There would be no capital gains tax liability or NIIT impact for you because you gifted the stock instead of selling it. In addition, you could claim a tax deduction (within allowable limits) matching the fair market value of the stock. In this example, making a $100,000 donation only requires you to reduce your holdings by that same amount, not a larger amount to cover taxes, as would be the case with a cash donation made from liquidating securities.

You keep more in your investment portfolio while still meeting your intended gifting target.

What to consider when gifting appreciated closely-held securities

• Gifting stock can help you diversify your portfolio more effectively if it’s highly concentrated in an individual stock.
• You can further diversify your portfolio by selling additional shares of the concentrated stock position. Realized capital gains can be at least partially offset by the itemized deductible value of the shares donated to charity.
• If the stock you choose to donate has been held for less than 12 months, the amount of the tax deduction will be equal to either the cost basis of the stock or the current fair market value, whichever is less.
• A similar gifting strategy can be applied to property you own (real estate, business interests) that could result in a capital gains tax liability if you sold the property.
• If you have a donor-advised fund, you also have the option of moving stock into the fund to capture the current tax deduction.

Note that to claim a deduction in the current tax year, the transfer of stock to a qualified charitable organization must occur by December 31. Be sure to plan ahead and start the process early in order to claim the potential tax deduction this year.

Qualified Charitable Distributions

If you’re 70 ½ or older, you have another option to consider for a tax-efficient charitable gift. A qualified charitable distribution (QCD) allows you to efficiently pass on up to $105,000 (adjusted yearly for inflation) directly from your IRA to qualified charitable organizations. If you’re subject to required minimum distribution rules (applicable after you reach age 73), a direct transfer from your IRA allows you to avoid claiming income from an IRA distribution in order to make your charitable donation.

A QCD has distinct advantages over making a direct cash donation. For example, if you took a distribution of $100,000 from your traditional IRA, most or all of the distribution would be subject to tax at ordinary federal income tax rates (up to a top rate of 37%). Not counting state and other taxes, those in the highest tax bracket would end up with a net distribution of $63,000. That amount could then be directed to a qualified charity as a cash gift and a deduction claimed for that amount (within applicable limits).

With a QCD, you do not claim any income from a distribution. Instead, the full amount of your donation up to $105,000 in a year goes to the directed charities and you avoid a significant taxable increase to your income. This may allow you to remain in a lower tax bracket and potentially avoid the 3.8% NIIT. It also allows you to maintain a lower level of income to minimize your tax liability on Social Security benefits or keep your income below thresholds that would add expense to Medicare Part B premiums.

What to consider when choosing a QCD

• If you’re not in need of the income generated by required distributions in any given year, a QCD is an effective way to benefit a favored charity and avoid having to claim income for an unneeded IRA distribution.
• If you’re married with separate qualifying IRAs, each of you may donate up to $105,000 in 2024 from your respective qualifying IRAs using QCDs.
• QCDs are an option for those who own traditional IRAs or are beneficiaries of inherited IRAs. SEP and SIMPLE IRAs cannot be used as vehicles to execute a QCD.
• If you have an inherited IRA, annual required distribution rules do not apply; however, you have only 10 years to fully liquidate the IRA, so QCDs can be used up to the $100,000 annual limit.
• To comply with IRA rules related to QCDs, you cannot first take possession of the distribution.
• If you receive any benefits in return for your gift, whether it’s your name on a building or a tote bag, the IRS will disallow the QCD. If the QCD should be disallowed, the cash value of the gift may still qualify to be deducted from your income if you itemize deductions on your tax return.
• QCDs cannot be used for gifts to private foundations, charitable trusts or donor-advised funds.
• A provision in the Secure 2.0 Act now allows individuals a one-time opportunity to use a  QCD to fund a Charitable Remainder Unit Trust (CRUT), Charitable Remainder Annuity Trust (CRAT) or a Charitable Gift Annuity (CGA). Up to $50,000 (indexed for inflation) can be directed using this one-time distribution option. If a distribution is directed to a CRUT or CRAT, it must be the only form of funding for that trust.
• The maximum contribution amount will increase annually based on the inflation rate.

Consider how charitable giving works within your wealth plan

Qualified charitable distributions and gifts of stocks offer prime opportunities to enhance your giving and achieve greater tax savings and should be considered as part of a broader gifting strategy.

It can help to talk to your wealth planning professional about how best to incorporate your giving goals into your larger wealth plan. Be sure to consult with your tax advisor to fully understand the rules and tax ramifications regarding your charitable giving options.

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