How charitable giving can offset bull market gains

Year-end donations can help clients mitigate next year's tax bite

Nov 10, 2014 @ 4:19 pm

By Darla Mercado

Charitable giving is on the rise this year as advisers and clients contend with the challenge of offsetting investments that have been climbing in value.

As the year winds down, advisers and tax experts gear up for a conversation with their clients on their charitable giving plans. It's a win-win: Needed funds go to the client's charity, while the investor reaps an income tax deduction from donating the assets.

“We're in the midst of a five-year bull market run, so you have appreciated capital assets and they're the best ones to use for charitable planning vehicles,” said Gavin Morrissey, senior vice president, wealth management at Commonwealth Financial Network.

The tax deduction is especially valuable to high-net-worth clients who wrote some sizable checks to the federal government for the 2013 tax year, thanks to the American Taxpayer Relief Act of 2012. Marginal income tax rates climbed to 39.6% for single filers with taxable income over $400,000 and married-filing-jointly tax payers with taxable income over $450,000. Those two groups are also subject to a long-term capital gains tax rate of 20%.

Don't forget the additional levies on singles with modified adjusted gross income of $200,000 and married couples filing jointly with $250,000. They get a 3.8% surtax on the lesser of income over those thresholds or net investment income, plus a 0.9% Medicare tax on wages over those limits.

Finally, there's the phaseout of personal exemptions and itemized deductions for singles with more than $250,000 in adjusted gross income and married couples with more than $300,000 in AGI.

(More: How to handle ATRA this year, including charitable donations to offset appreciated stock)

If clients didn't get the value of charitable planning as a strategy during the 2013 tax year, they're sure to understand it now. They're feeling more generous in 2014: Fidelity Charitable made $1.6 billion in total donor-recommended grants for the first nine months of this year, up 27% from the year-earlier period.

Donors aren't just giving appreciated stock. They're also giving away their own interests in small businesses, noted Karla Valas, managing director of the complex asset group at Fidelity Charitable.

Taxpayers collect a fair market value charitable deduction when they donate their stock holdings and avoid paying capital gains taxes.

With the donation of a privately-held business interest, owners facing an exit can choose to donate — instead of cash or stock — the most appreciated asset that would otherwise trigger the most gains.

“The beauty of it is that it's a huge amount of money to donate, and I can't possibly use up all of the deduction in one year,” Ms. Valas said. “You can roll the deduction forward for five years.”

“It's a double-tax benefit above the cash gift,” she added.

Advisers are also on the edge of their seats with respect to another charitable giving strategy: the charitable IRA rollover or qualified charitable distribution. Now, at the tail end of the year, there's still no word as to whether so-called QCDs will be reinstated for the future.

But Ed Slott, IRA expert, suggested that advisers consider using the strategy as Congress could reinstate the QCD retroactively.

Here's how it works: An IRA owner or a beneficiary aged 70-1/2 and older can give directly to a qualified charity from their IRA, excluding up to $100,000 from their gross income. This donation satisfies the required minimum distribution that the client would otherwise have to make.

“The IRA is infested with taxes, and that's the asset that you want to give to charity,” Mr. Slott said.

The case for making the donation from the IRA is that if the QCD is reinstated retroactively, the donor is meeting his required minimum distribution without raising his income and potentially bumping himself into a higher tax bracket.

Worst case scenario: Congress doesn't bring back the QCD, and the client's distribution is counted toward income. In that case, the client can claim a charitable deduction for the money that went directly to the charity and get rid of an asset that is otherwise heavily taxed, said Mr. Slott.

“You might be better off giving away the IRA and holding onto low-basis stock for your kids,” he said. Low basis stock that's appreciated greatly will receive a step up in basis once the owner dies, meaning the person who inherits it can sell it without realizing massive capital gains.


What do you think?

View comments

Recommended next

Upcoming event

Nov 19


New York Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print