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How To Get The Most Tax Benefit From Charitable Contributions

| March 04, 2021
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In today's episode Nicholas Olesen, CFP®, CPWA® shares some great strategies to help reduce your taxes through direct stock contributions to charities. The team at Kathmere has found this, along with Donor Advised Funds, to be some of the best ways to maximize your tax benefit from charitable donations.

  • The difference in cash vs stock donations
  • The benefit from donating stock
  • 3 rules to avoid a tax headache
  • The best and worst types of stock to donate
  • How to "lump" donations together to maximize itemized vs standard deduction levels

Please send us feedback and any topic or questions you would like us to cover.  Email us at: nolesen@kathmere.com

Rough Transcript:

Hi, welcome to A Wealth Of Advice. My name is Nick Olesen, Director of Private Wealth at cashmere Capital. As we're entering another tax season, I thought it would be helpful to talk about how you can reduce your taxes by donating stock to charities specifically through using a donor advised fund. Like me, you've probably written a check or given cash or donated items to various charities, but was that really the most advantageous way? Probably not.

For certain investors directly donating stocks of publicly traded companies can really be the most advantageous and most appealing way to contribute to those causes. Donating stock can even yield a number of tax benefits, which is really the added benefit that we're going to talk about today. But the process is really nuanced and there's a lot of pros and cons. The benefits of donating to those charities really depend heavily on your situation, long-term goals and what approach you're taking and strategy to kind of share those gifts over time. Now donating appreciated stocks of shares can really be a huge benefit to both you and the charities specifically around capital gains tax.

If you donate a security with an unrealized capital gain, you don't have to pay taxes on that gain, nor will the charity. Even better, it's a tax deduction for you if you itemize your taxes. Now this allows individuals to claim that tax deduction against what's called the fair market value or the value of the shares that you donated at the time of transfer. Now that is assuming that you've owned the shares for more than one year. I'll talk about kind of a couple of rules here because it all sounds great as of right now. But there's three general rules to make this not a major tax headache for you.

One is be aware that there's an AGI deduction limit. Now for a lot of people that doesn't come into effect, but when you're donating a large amount of shares against your income to help offset some taxes, you need to be aware of this. Normally for a cash donation, you can deduct up to 60% of your AGI, your adjusted gross income. With stock donations, however, you're limited to 30% of your AGI. Meaning that you may carry this deduction in the future years forward. So what we do a lot of times for clients is if you're in a year where you have a very large income year, you've sold a business, or you've had a very large payout, we will use that as the year that we actually make the contribution to this donor advised fund, that I'm going to touch on in a second, or, or give you this charity deduction so that you do stay within that 30% AGI number.

Now rule number two is you have to maintain receipts. The charity needs to send you a written confirmation of your contribution. And on there, you really should have their name, address, and the tax ID of that charity. The date of your contribution, the type of shares, the stocks, the number of them, fair market value, you name it, everything should be on there. And then a confirmation that you did not receive any good or service in exchange for it if you do want this full deduction.

Rule number three, I touched on it earlier, but you have to make sure that the shares you're donating those exact lots of shares you're donating, you've held onto for at least a year. And just an added bonus, make sure they're the ones with the largest unrealized gain.

So, since we talked about some of the rules, which shares should you be looking at and how should you determine this? Now, obviously there's a lot of tax optimization that goes into this. One of the things that we look at is kind of a general rule is winner stocks. It sounds kind of funny, but the most highly appreciated stocks are really the most attractive group to put into this technique for tax deductions and for charities.

Now if your portfolio is holding any stock with a large unrealized long-term capital gain. Again, we're talking about a non-retirement type of account. If this gain would cause you a capital gain in the future or today, if you sold it, it's probably a good candidate for this tax donation. Now that we've talked on, what type of stocks make the most sense?

Which ones don't make the most sense. So obviously I've touched on it twice now, but if you've owned the stock for less than one year, please do not make it the one that you deduct or that you put in as a contribution into your donor advised fund or directly to the charities. There is a technique to possibly hit that requirement, but you're better off just really not doing that for a lot of reasons. You're still going to be subject to this short term capital gains tax on it.

Now loser stocks, it sounds kind of funny, but again, winter stocks were in the positive side of which ones you should donate. Loser stocks. You should frankly, just take the loss and donate the cash. It's much better than trying to donate the stock. If it's a loss on your portfolio, you can't get the tax deduction. And they are I'm sorry, the capital gain lost offset future gains. So just take the loss, donate the cash.

The other one is, is you can donate them, but I would not recommend donating highly I'm sorry. Privately held stocks. Or restricted shares of public stocks. They're really not charity friendly. There's just a lot of rules that they have to follow in order to sell them off. A lot of times, if it's a private company, they have to go get valuations and it's really just an administrative nightmare for them. So. I would recommend if it can be a liquid public company and a winter stock, those are kind of the best ones that you can.

Now there's a whole list of charities. I'm actually going to put a link in the show notes to the list. The IRS puts out there as far as what organizations you can put the money into and put the donation of stock directly into. But again, what I want to do is talk about these donor advised funds and the reason why is so far, what we've talked about is what type of stock you should do to donate to charities and why that is an advantageous exercise, both for the charity who receives it, doesn't pay any taxes, and for you getting the tax deduction. But a lot of investors that we work with find it really advantageous to set up this unique charitable structure it's called a donor advise fund. And it's really a way for us to optimize the tax treatment. I say that because we're able to contribute stock in where we know we have higher income and then not actually pay out the money to charities until a future date.

That's advantageous for a lot of our clients when they sell a business where they have a large income year, we're trying to get that income down for tax reasons. If you're going to pay 37% federal plus, you know, other taxes and then, you know, New York at 6 to 13% tax, you're immediately talking about almost 50% of your dollars going towards tax. So if you can deduct part of that through this. Did charity contribution into a donor advised fund, but you don't want to pay that out. Let's say that you, you received a $2 million compensation for the year and you don't want it to pay out to all the charities for this enormous contribution that you're making. You can put the money or put the stock directly in the donor advised fund, received the deduction for it, liquidate it within the donor advised fund and then paid out over time. You can either cash out immediately or reallocate it over time and you then can also reinvest the capital. So if you have a stock that has done incredibly well, and you have a low cost basis and you don't want to pay the capital gain tax on it, but you are charitably inclined and you want to pay it over time, it's a fantastic option for you to do that.

The other one that we want to remember when you're doing this, as you have to itemize your taxes, if you really fall below the standard deduction line, which again is about $24,000, this donor advise fund is a fantastic way to bucket several years of contributions that you might make to a charity into one year. And that, that for that one year, you're going to take the itemized deduction and then the future years, you can do the standard deduction and it gives you that flexibility to consistently pay out to a charity over time, because you don't want to give them a very large contribution once, but you'd like to do it annually, if you will.That's a way for you to do it.

So I hope this was helpful. I know I ran through a lot of information in a short period of time there, but we just wanted to touch on a strategy that is used. A lot, if you're charitably inclined and you know, you're investing in stocks have done well. So look into these donor advised funds.

If you have any questions or you want us to go into more details on them but I kind of gave you a couple of rules in there. And, and the gist of how they work. So I hope that was helpful. Thanks for tuning in today. Have a great rest of the day. Take care.

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