As a corporate executive, your days are highly scheduled and regulated. The time you can devote to working with charities may be limited, but you can nevertheless make a substantial impact without the time commitment. Whether your interests lean toward education and the arts, international health crises, faith-based organizations, or animal and environmental rights, your successful executive career path has earned you the opportunity to financially support the causes you most admire.
High income earners are often given golden opportunities to donate to charitable organizations. The generous donations you make to your favored causes impact lives in a very real way, but they can—and should—also impact your wealth management plan. With expert advice from a trusted wealth management advisor, you can effectively offset capital gains with charitable contributions.
As an experienced executive financial advisor, I understand how to achieve a balance between impacting your community and the world at large while effectively leveraging charitable donations in your favor when tax time inevitably rolls around. Let’s discuss the types of assets that are affected by the capital gains tax, along with the assets that can be donated to charity to help offset them.
Understanding Which Assets Qualify for a Capital Gains Tax
As an executive, you might have more investment accounts than you care to admit. Life and career changes, such as accepting a promotion or being offered a position at a new company, can inevitably cause IRA, 401(k), and company stock option accounts to accumulate over time. To offset capital gains, the important thing to understand is whether each account is considered qualified or non-qualified.
A qualified account holds or contains investment dollars that have never been taxed. In essence, they defer taxes until the money invested is withdrawn. For example, a 401(k) and a traditional IRA are both considered to be qualified accounts.
In contrast, a non-qualified account holds funds that are eligible for capital gains taxation year after year on any gains incurred. Stocks, bonds, and other investments owned inside a standard investment account are examples of non-qualified assets. Any investments held in a non-qualified account could be eligible for capital gains taxation.
It is crucial to be aware of how each of your accounts is structured and to consider consolidating similar accounts with the help of a trusted wealth management advisor. By consolidating accounts leftover from previous employers, for instance, you will amplify your earning potential and create an environment that allows for greater gains over time. However, your advisor should also be prepared to consult with you about a charitable contribution strategy to effectively offset capital gains.
The Charitable Contribution Options That Can Offset Your Capital Gains
While there are almost as many ways to make charitable contributions as there are nonprofit organizations, I want to focus on one of the most effective contribution strategies for offsetting any capital gains you may encounter in your non-qualified accounts—or in future funds from a qualified account. Options for improving your tax situation via your charitable contributions are: making a monetary donation, donating stock, donating complex assets, or using a qualified charitable distribution (QCD). Keep in mind that each option should only be considered as advised by your executive wealth manager.
A monetary charitable donation is exactly what it sounds like: simply writing a check to the charity of your choice. While this is the most common and straightforward way to give money to charity, it does have its limitations. Charitable donations, in general, are tax-deductible—but only up to 60%. Regardless, donating cash to charities will lower your overall taxable income, which will, in turn, offset some of your capital gains.
One surefire way to completely avoid the capital gains tax on an appreciated stock is to donate the stock outright. If you were to sell the security prior to making the donation, you would be required to pay the capital gains tax and only be eligible for a smaller tax deduction. The charity would also receive a reduced donation.
However, if you directly donate the stock, bond, mutual fund, or other security to the charity of your choice, you most effectively leverage your donation for all parties involved. This strategy ensures that you will be eligible to take a tax deduction of up to 30 percent of your AGI. It’s important to note that, when donating stock to charity, it’s particularly important to work with an executive financial advisor who has experience with these types of transactions.
Complex Asset Donations
Other assets that can be donated to charity directly, and therefore effectively offset your capital gains tax, are complex assets such as private company stock, restricted stock, real estate, alternative investments, or other appreciated property. Your appreciated assets could be a capital gains nightmare if you intend to sell them in the future, especially if they have a particularly low cost basis.
For instance, if you were one of the founding members of a private company, your company stock may have a zero cost basis. This could result in massive capital gains at the time of sale—unless you opt to donate it as a charitable contribution with the help of your wealth manager.
Qualified Charitable Distributions
Last but not least is the qualified charitable distribution (QCD) strategy. This is a great option for making charitable contributions if you are over the age of 70 ½ and own a qualified investment account. A qualified charitable distribution is an otherwise taxable distribution from an IRA that is paid directly from the IRA to a qualified charity, thus negating your tax responsibility.
One of the great benefits of utilizing a QCD to offset capital gains is that it can also satisfy your required minimum distribution (RMD), i.e. the percentage of your overall qualified accounts required to be withdrawn each year. If you don’t have a particular need for the income and want to avoid either increasing your taxable income amount or changing your current capital gains tax bracket, you should consider donating your RMD, up to a maximum of $100,000, directly to a charity with the guidance of your executive financial advisor.
While a QCD can help avoid or offset taxation on your RMD, it is also not reported as a deduction, and therefore does not count against your charitable gifting limits. This is an enormous financial benefit if you plan to maximize your charitable donations elsewhere but still need to satisfy your RMD and offset any tax consequences that come from it.
We all want to play a part in making the world a better place. Offsetting capital gains with charitable contributions creates a win-win scenario for you and your favored charitable organizations. Understanding the types of assets that you currently hold is a great starting point, while positioning particular assets for donation to charity is an important second step. Lastly, donating the asset or assets that best offsets your capital gains tax is the most effective way, for all parties, to make and receive a charitable contribution. By working with an experienced executive financial advisor, you can accomplish all three of these steps easily and efficiently—for yourself and the charity you love to support.
Helping charitable organizations while financially benefiting our clients is one of the most rewarding aspects of being a wealth advisor. 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. For more information on how Wade and the Carpenter Team can advise you on how to offset capital gains with charitable contributions, reach out today for a complimentary consultation.
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