“A win-win.” That’s what I strive for whenever I’m talking with executive clients about their charitable giving goals, whether it’s supporting the creation of a new park or school, or making regular donations to a favorite non-profit. While the aim of the philanthropic endeavor is to benefit the charity, we all can agree that reducing the executive’s taxable burden through charitable giving is also important.
When many people think of making a charitable donation, their mind immediately goes to pulling out the checkbook to make that gift. However, there are other methods that can be tax efficient for high net worth individuals, making them a “win-win” for the charity and the executive. Here’s a closer look at five charitable giving tax strategies to consider. When implemented with an experienced wealth manager, these strategies can help you to maximize your charitable donation and lessen your tax burden at the same time.
Donate Concentrated Low Cost Basis Stock
Top-level executives are often offered employee stock options as part of their equity compensation plan. If you work for a thriving company, you likely hold company stock options that were exercised or can be exercised for a very low price (low cost basis) relative to the current market value of the stock.
While this is good news overall, it can create a sizable tax burden for the year in which the stock is sold. Even if you plan to sell the stock and then donate to your favorite charity, you’re still required to pay tax on the income you make from selling the stock. You can expect to pay the ordinary income rate for non-qualified stock options and the long or short-term capital gains rate for incentive stock options.
An alternative to selling the stock and then donating the cash is to give the stock directly to the charity you wish to financially support. Many charities and non-profit organizations have handled this type of donation before as it is not a new strategy by any means.
This method offers you a couple of benefits:
- It maximizes your donation by eliminating the need to pay taxes. Most non-profit organizations are not required to pay long-term capital gains. They also have the option to hold onto the stock, allow it to appreciate further, and sell it at a later date if they don’t have an immediate need for the income.
- It can help balance your portfolio by lowering the concentrated ownership of one individual stock. This a common theme among executives that work for companies who have grown over the years. Often, executives don’t realize just how much of their net worth is tied to one company stock.
Use a Donor-Advised Fund
Another strategy I have helped many executives implement is establishing a donor-advised fund (DAF). A DAF is set up with the help of a financial advisor. It is an account in which you can place funds you intend to go to charity before they’re actually donated.
This popular charitable giving tax strategy offers you two main benefits:
- You can take a tax deduction for a charitable donation when you place funds in your DAF, even if the money doesn’t go to a charity in the same year.
- You have the flexibility to hold the donations in the account for as long as you see fit. Meanwhile, the money has the potential to grow inside of the DAF, depending on how you invest it. You can then decide what charities the money should go to and when.
Use Qualified Charitable Distributions
If you are around the age of 70, you are likely familiar with the term required minimum distribution (RMD). An RMD is a percentage of all of your qualified retirement accounts that is required to be taken out every year starting when you turn 70½. The IRS mandates this on your qualified accounts because they have never been taxed.
If you don’t have a need for the income at that age, one charitable giving tax strategy is to turn your RMDs into qualified charitable distributions (QCD). By doing this, you send the distribution directly to a charity.
The benefits of this strategy include:
- The ability to avoid the increased income taxation you otherwise would incur, which is a tremendous benefit for those who don’t require the extra income.
- The distribution does not count against your charitable gifting limits, making it a good strategy to use on its own or in conjunction with other charitable giving strategies.
Donate Real Estate
Much like the scenario of donating stock directly to a charity, you can donate real estate to a charity. If you no longer have a need for an extra property or are considering downsizing, this can be an especially effective charitable giving tax strategy. It’s effective for two main reasons:
- You can take a tax deduction on the fair market value of the property as reported by a qualified house appraisal.
- Charitable organizations aren’t required to pay capital gains taxes. So, any low cost basis you hold on the property is irrelevant to the benefactor of your donation.
Give Private Shares
If you own shares of a private company, such as an S-Corp, and no longer have a need or desire to hold those shares, you can donate those privately held shares directly to the charity of your choice. Or, you can use a DAF to hold the shares until you know to whom and when you want to donate them.
The benefits of this strategy include:
- Donating the private stock directly avoids any capital gains tax that you would otherwise incur.
- You gain a charitable donation deduction on your taxes for that given year. Generally, you will be able to deduct the fair market value of the stock as valued by a qualified independent third party.
As a top-level executive, you’ve worked extremely hard to reach a point where you can financially support the causes you are most passionate about. Doing so in a tax-efficient way can help ensure everyone benefits fully from your gifts. Whether you decide to implement one or all of the above charitable giving tax strategies, it’s recommended that you work with a financial advisor experienced in helping high net worth individuals effectively donate to charity. A wealth manager can assess your charitable goals and help you evaluate strategies to effectively make your community and world a better place.
K. Wade Carpenter, CFP®, AIF®, ChFC®, CLU®, is an innovative wealth manager serving corporate executives and entrepreneurs from coast to coast. Throughout his more than 25-year career, Wade’s focus on C-level clients has made him a top strategist for integrated asset allocation and equity compensation management. He also can provide expert guidance on effective charitable giving tax strategies. For more information on how Wade and the Carpenter Team can help you reach your financial goals, reach out today for a complimentary consultation.
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