As we get closer to the holiday season and the end of the year, and people start thinking about making charitable donations for both philanthropic and tax purposes, the easiest thing to do is write a check to the charity of your choice. But that might not be the most efficient way to give. Here are some choices to consider:
If you donate stock you've held for at least 12 months, you can deduct the full value of the investment without having to pay any capital gains on the appreciation. The current fair market value of the stock is deducted from your taxable income. In fact, you could consider gifting your biggest winners, which maximizes your savings on capital gains taxes, and then buying back the same issue if you want to keep it in your portfolio.
Shares From an Employee Stock Ownership Program
If you've been participating in an ESOP, there are advantages to using this for a stock donation. You've likely held on to these securities for longer than the 12-month limit, and for many people the stock in their own company can come to represent an outsized part of their holdings. If it's time for you to rebalance your portfolio, consider donating some of your company's stock to charity.
Rather than stocks, you can also give away shares in mutual funds to charity. Just keep in mind that you can't redeem your shares and then give the cash to the charity, or you will lose the tax benefits of donating appreciated shares. Make sure the fund company transfers your shares directly to the charity.
Qualified Charitable Donation (QCD)
If you need to take a required minimum distribution (RMD) from your IRA, you can instead transfer up to $100,000 tax-free per year to a charity and decrease your RMD by the same amount. You must be 70 1⁄2 or older to take advantage of this strategy.
Donor Advised Fund
Similar to a family foundation but with less administrative responsibilities, a donor-advised fund can also take appreciated stock, but that's not its only tax advantage. When you make a donation to a donor advised fund, you can take the tax deduction now, even if you haven't yet identified the charity that you want to contribute to. You can also bunch the contributions during a high-income year to maximize the deduction, and then parcel out the donations over time as the assets inside the fund grow tax-free. Your Baird Financial Advisor can help you establish your own Donor Advised Fund.
Writing a check is the easiest way to contribute to charity, but taking a little more time to plan your gift can benefit both you and the recipient of your donation. Talk to your Baird Financial Advisor about how you can make the most out of your charitable contributions this year.
The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.