Two of the Best Tax Techniques for Donating to Charity

We're entering into the season of giving. With the holidays around the corner, many people are thinking about charity. While most retirees still choose to donate by writing a check or filling the collection plate, there are certain tax advantages to giving to charity using different methods. In this month's FinPlan Friday conversation, Joe talks about how you can help retired clients be more tax-efficient with their charitable giving. 


FinPlan Friday Nov 2021

FinPlan Fridays

In our video blog series, FinPlan Fridays, Covisum® Founder and President Joe Elsasser, CFP®, offers his take on the issues financial advisors see every day. Joe is a practicing financial planner with a unique perspective on the challenges Covisum provides technology solutions. Join us on the first Friday of every month for FinPlan Fridays and get helpful tips to grow your financial planning practice. 


I'm Joe Elsasser, CFP®, Founder and President of Covisum, and I'm also a practicing financial advisor. Welcome to another FinPlan Friday. Today's topic is charitable giving. Most charitable gifts are given in an old-fashioned way, like as a check or cash in an envelope. Although giving this way helps the charity, there are a variety of other forms of giving that might have an additional impact because they carry some tax advantages. Today we'll talk about gifting appreciated stock and donor-advised funds. Both of these techniques can be beneficial.

Gifting Appreciated Stock

The gift of appreciated stock is attractive if your client is in a situation where they would pay capital gains tax. There's no additional advantage to gifting appreciated stock if someone's in a 0% capital gains bracket. However, suppose they're in at least the 15% or 20% capital gains bracket, and maybe even paying an additional 3.8% net investment income tax. In that case, those gifts can be dramatically more valuable if you can skip the capital gains tax. You do that by gifting the security itself, the appreciated security, directly to the charity rather than liquidating it first and giving the money to charity. That distinction is important because if you give the appreciated security directly to the charity, it entirely escapes that capital gains tax. In other words, it creates an additional 15%, 18.8%, 20%, or 23.8% impact to the charity for the same gift amount where it is not given in that manner. So that is a valuable technique for many people who would otherwise pay tax on their capital gains.

Donor-Advised Fund

Now, in a case where you're considering the benefits of a donor-advised fund versus gifting appreciated securities, remember this: if you have highly appreciated securities and you're in a higher effective tax rate for capital gains, it's going to make sense to follow the former technique. But if you're not giving a highly appreciated security, sometimes it can make sense to use a donor-advised fund to accelerate gifts you might give in future years into a current year where you might have higher income.

Severance Package at Retirement

Consider this. In the year of retirement, an individual gets a severance package, which pushes their income tax bracket into a much higher rate than it would be in a typical year. They also have additional cash, and they give a certain amount to charities every year. In this case, for this year, the individual may want to donate more than usual to the donor-advised fund. Contributing more to the fund will reduce some of the tax implications of the severance package, and later, the individual can spread out the gifts from the donor-advised funds. The charity receives the gifts in precisely the same way as they would otherwise. The only difference is that the tax deduction has more impact this year.

So, those are two techniques that are unusual for many individuals, but they can add a lot of value if advisors are looking for these situations for their clients. Thanks so much, and we hope you'll join us next month.

Tax Clarity

You want to show clients and prospects the value you add. The Tax Map feature in our Tax Clarity® software displays your clients' retirement tax landscape and makes it easy to find hidden tax opportunities. Watch this software demonstration to see how. 

New call-to-action