The last float in Macy’s Thanksgiving parade is everyone’s favorite holiday figure: Saint Nicholas.
The Santa float is a sign that the holidays are finally here and the gift-giving season is in full swing. Macy’s end goal is for shoppers to get excited for the holidays and begin shopping for gifts at their store. Macy’s doesn’t have the monopoly on gift giving though.
Now is the time to check your charitable list for possible turbo charging opportunities. Check to see if you have any securities in a gain position that you can use for charitable gifts today.
Charities like hospitals, universities, and the Jimmy Fund will accept stocks, bonds and other assets as gifts. For those looking to give back more, this presents a wider opportunity to donate to your charity of choice. It also presents a few financial benefits for you as well.
In giving these as gifts you will get a tax deduction for the value of the security and avoid capital gains on the position transferred. You can then repurchase the securities with the cash you were going to use for the gift. Everyone wins, with the added benefit of preserving your wealth to address your financial goals. Long term appreciated assets like securities are capped at 30% of your AGI.
For individuals 70 ½ and older, you can make annual donations of $100,000 from your IRA tax-free. Normally you would be penalized for taking money out of your account. For this to work, funds must be directly transferred from the IRA to the charity.
Although they come with some costs, the Golden years have some amazing benefits when it comes to preserving your family’s wealth. Let’s look deeper into the types of contributions you can make around the holidays that can benefit you come tax season.
Donor Advised Fund
A Donor Advised Fund (DAF) allows donors to make charitable contributions, receive tax deductions, and recommend grant distributions.
The first step is to give a personal offering of stocks, cash, real estate, and other assets to the fund. After, you receive an immediate max tax deduction from the IRS. As the value of the assets in the fund grow, you can gift the capital gains to charities like The Salvation Army. This is a great option for donors who are uncertain on how they would like their funds to be distributed. Deductions occur in the year of the original lump sum donation. Investors place money into the fund during high-income years for greater tax deductions. In addition to the income tax deduction you receive, capital gains tax will also be avoided. Accountants consider this a double whammy.
All cash donations must be supported by bank records and are capped at 60% of your AGI. To be eligible for tax deductions, all contributions must be made by December 31st. If you were to mail out a check on the 31st, it would still be written off for the same calendar year.
The stock market has had a nice run this year, the Dow Jones has grown 18.7% as of November 2019. Leveraging charitable pledges grants wealth holders with an opportunity to potentially avoid tax penalties. Do not allow your capital gains to squander, allot them to a cause that you are passionate about today.
Aside from securities, you can donate tangible assets to charitable organizations.
Tangible assets being any physical object that you wish to gift to an organization. To do this, the IRS needs you to find the fair market value of the product for tax purposes. The fair market value includes the condition of each asset and the cost to replace them.
If you donated a car that costs $4,000 and it depreciated by $3,000, you are still entitled to a $1,000 deduction. This option is more logical than letting unused assets continue to depreciate. Holding depreciating assets is no different than leaving milk on the countertop. Here are a few popular alternatives to consider: artwork, clothing, jewelry, and gems. Make sure to receive a written acknowledgement for your contribution for tax purposes.
Best of all, you can write off your kids old toys! Take a tour through your children’s old toys and video games, they may save you some money on your taxes. Like all other assets, to write them off, you must be able to present a strong case for their fair market value. This can be done by searching websites like eBay for the products current selling price. After, find the cost of replacing the items and determine the amount that can be deducted.
This strategy is great for getting rid of used toys, saving money, and giving them to a great cause! Gifting securities or tangible assets this time of year can provide immense benefits, not just in terms of giving back to your community but also when it comes to tax season as well. While giving is worthwhile in and of itself, you’re leaving money on the table by ignoring these benefits allowed by the IRS.
Some cons to be aware of
While there are numerous benefits to Donor Advised Funds, there are a few things to bear in mind.
There can be a gap between when an asset is gifted and when a charity actually receives the money (it can be months, but sometimes years) and as a result DAFs have been accused of slowing down the flow of money to charities. DAFs have been criticised as a ‘bad deal for charities’ most notably by New York philanthropist Lewis Cullman. That said, the ability to hold the asset longer does have a potential upside in that it can increase in value.
Another potential downside is the fact that after the asset is gifted, the donor cedes all control to the sponsor of the DAF. Granted, most act accordingly and gif the asset properly but there have been cases where this did not happen as described by this Investopedia article on a fund that went bankrupt.
There are always going to be risks when it comes to financial management so it is important to understand the cons in addition to the pros. At M3 Wealth Advisors we are here to guide you through the process and answer any questions that come up.
At M3 we’re here for you
Here at M3 Wealth, we have experience leveraging tax-efficient investment strategies to help mitigate your tax burden. Don’t allow your finances to drain by not utilizing tax deduction strategies.
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M3 Wealth Advisors and Integrated Financial Partners do not provide tax or legal advice.