Help Clients Make Charitable Giving History

2017 may well be a record breaking year for philanthropy in the United States. Three significant contributing factors—strong markets, possible tax reform, and increased support for disaster relief and recovery—suggest that now may be an ideal time for clients to embrace charitable giving, perhaps more than ever before. Giving now, rather than later in the year, could also be prudent given the potential for market volatility.

1. An improving economy and strong market performance have generated significant appreciation of investment assets, some of which can be donated to avoid or offset higher tax bills.

The S&P 500^® stock market index has risen more than 70% in the last five years¹ and commercial and residential real estate prices have reached all-time highs². Because of healthy gains in investments, privately held business interests and real estate holdings, clients may face higher tax bills this year. Donating appreciated assets or investments that have been held for more than one year to charity can help offset these taxes. Compared to selling the assets first and donating the cash proceeds, contributing appreciated assets or investments to a donor-advised fund or another public charity has several benefits:

1. When an asset or investment is donated to charity, the donor avoids paying capital gains tax on the sale of assets, which can increase their charitable giving as much as 20%, depending on the donor’s tax bracket.
2. Donors can generally claim a charitable deduction for the full, fair market value of the donated securities up to 30% of adjusted gross income. Amounts in excess of 30% can potentially be carried forward for as many as five years.
3. Amounts contributed to a donor-advised fund can be granted over time to the donor’s favorite charities.

Two hypothetical scenarios illustrate the potential for greater philanthropic impact and tax savings from donating $100,000 in appreciated investments that have been held for more than a year versus selling them and then granting the cash, after taxes, to charity³. Scenario 2 allows donors to potentially give up to 20% more to charity.

2. Future tax reform legislation and a tax deadline for hedge funds may lead clients to increase charitable giving.

The value of charitable and other itemized deductions increased in 2013 when income tax and capital gains tax rates increased for most high income earners. The top marginal tax rate for high income earners is currently 39.6% and the top rate on capital gains and qualified dividends is 20%. Tax reform is moving through Congress and 70% of donors believe new tax rules are likely to take effect in 2018 or 2019⁴. Any reduction in income or capital gains tax rates could lower the value of charitable deductions. To provide maximum support for their favorite causes, clients may prefer to increase their charitable giving this year to realize the existing tax benefits.

Clients with offshore income from hedge fund management fees may also choose to increase their charitable giving this year. A 2008 change in the tax code requires hedge fund managers to repatriate fees paid by offshore clients who are not subject to U.S. taxes by the end of 2017. Contributing to a donor-advised fund or another public charity could help offset these taxes and enable a higher level of deductibility than a private foundation.

3. An unprecedented need for disaster relief and recovery may encourage increased giving.

September was the most active month on record for Atlantic Hurricanes⁵, which impacted hundreds of thousands of victims. These and other devastating disasters, including earthquakes and wildfires, have left victims in need of food, shelter, clean water, electricity and access to medical care. Americans have been active in disaster relief efforts and advisors can help clients understand how to increase their impact with tax-smart giving as part of a charitable plan.

Your clients have an opportunity to make charitable giving history.

From 1976 through most of the 1990s, total U.S. giving was less than 2% of gross domestic product (GDP). At the end of the dotcom era, we saw an important change. Giving passed 2% of GDP and mostly stayed there. This is a positive milestone, but in the past decade, total charitable giving has not exceeded 2.1% of GDP.⁶ Each 0.1% of GDP currently represents more than $18 billion in additional charitable giving. That is more than all the annual donations to America’s top ten operating charities.⁷ Can Americans break through the 2.1% ceiling? We may find out in 2017.

Americans are consistently among the most generous people in the world, and the conditions are favorable in 2017 for donors who want to maximize the impact of their philanthropy. With potential tax reform looming, the possibility of market volatility, and the continued need for disaster relief and rebuilding efforts, increasing charitable giving could be a tax-smart choice that helps clients maximize their impact on non-profits for years to come.

Kim Laughton is President of Schwab Charitable Fund, an independent 501(c)(3) public charity with a mission to increase charitable giving in the U.S. by providing a tax-smart and simple giving solution to donors and their investment advisors.

Learn more about helping clients maximize their charitable contribution deductions.

Comparative indices are unmanaged and it is not possible to invest directly in an index.
Schwab Charitable is the name used for the combined programs and services of Schwab Charitable Fund, an independent nonprofit organization. The Schwab Charitable Fund has entered into service agreements with certain affiliates of The Charles Schwab Corporation.

Contributions of securities held for longer than one year are generally deductible at fair market value (FMV); securities held for one year or less have the same AGI limits as cash contributions (50%), but the valuation is based on the lesser of the cost basis or FMV. Contributions that exceed AGI limitations may be carried forward and deducted for five years. An account holder’s ability to claim itemized deductions may be subject to further limitations depending upon the donor’s specific tax situation and account holders should consult their tax advisors.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab Charitable recommends consultation with a qualified tax advisor, CPA, Financial Planner or Investment Manager.

Schwab Charitable accepts illiquid assets for contribution on a case by case basis.

A donor’s ability to claim itemized deductions is subject to a variety of limitations depending on the donor’s specific tax situation. Consult your tax advisor for more information (1117-76XG).

¹ Based on the monthly closing price, adjusted for dividends and splits, from October 24, 2012 to October 24, 2017.

² S&P Corelogic Case-Shiller U.S. National Home Price Index as of July 2017 and Green Street Advisors U.S. Commercial Property Price Index as of August 2017.

³ Assumes a 39.6% tax bracket, cost basis of $5,000 and long-term capital gains rate of 20%. Does not account for state or local taxes. Certain federal income tax deductions, including the charitable contribution, are available only to taxpayers who itemize deductions, and may be subject to reduction for taxpayers with adjusted gross income (AGI) above certain levels. In addition, deductions for charitable contributions may be limited based on the type of property donated, the type of charity, and the donor’s AGI.

⁴ Schwab Charitable donor survey, June 2017.

⁵ National Hurricane Center
⁶ Since 2005, giving has not exceeded 2.1% of GDP. Source: Giving USA: The Annual Report on Philanthropy, 2017.
⁷ The Chronicle of Philanthropy, October 2016.