Guidance

RESOURCES TO HELP SHAPE YOUR FINANCIAL FUTURE

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Ethel R. Kaplan, J.D., CTFA
Senior Vice President and Trust Officer
The Chicago Trust Company

For the charitably inclined, there are strategic ways of giving that can accomplish both goals. Generally, if you itemize your deductions, you can decrease your tax bill by making charitable contributions. While the most common gift is the direct cash contribution, here are five strategic ways to give that will help you make the most of your giving this year.

First, consider making a direct gift to the charity of your choice with appreciated securities such as stocks, bonds or mutual funds rather than cash. Using appreciated securities has two advantages. One, you avoid paying capital gains on the appreciation, and two, you get a charitable deduction for the full fair market value of the securities donated. Consider as an example Bill and Mary, who purchased publically traded stock 10 years ago for $20,000. The stock is now valued at $50,000. Bill and Mary pay tax on capital gains at 20%. If they sell the stock, they will pay a capital gains tax of $6,000 on the $30,000 of gain realized. This leaves $44,000 for the charity, and Bill and Mary get a $44,000 tax deduction. If, however, they donate the stock to the public charity, they avoid the tax, the charity gets $6,000 more and Bill’s and Mary’s tax deduction is $50,000.

Second, if you are considering converting your standard IRA to a Roth IRA, you might want to use a charitable deduction to offset the tax cost of the conversion. A conversion is a good strategy if you believe that your tax bracket will be higher in retirement than it is now. With a standard IRA, you deduct contributions when they are made, but pay tax at ordinary income rates when they are withdrawn. With a Roth IRA, contributions are not tax deductible, however you pay no tax on withdrawals. When you convert, you pay the tax on full value of the converted IRA’s assets. If you make a significant gift to charity, you may be able to offset the conversion tax. If you make that gift with appreciated securities, you will be able to offset even more.

A third strategy is to establish a Donor Advised Fund (DAF), such as Wintrust’s “Generations in Giving” program. Assume you need a large deduction this year but you are not sure you want it all to go to one charity. In this case, you can establish a DAF by making your donation to a public charity sponsoring the DAF. In doing so, you get a full tax deduction when you make the contribution to the DAF. Meanwhile, the charity holds the funds in your account until you decide to recommend contributions to specific charities that you want to benefit.

Do you own your own business? Are you considering selling? Then the fourth strategy—donating your closely held shares to charity—is something to consider. The process of donating such illiquid assets is somewhat more complicated than donating cash or publicly traded securities, but it has the potential for significant tax savings. Such shares generally have a very low, or even zero, cost basis so the potential for saving capital gains taxes can be substantial. The charity can then sell the asset and the donor gets to deduct the full fair market value based on a qualified appraisal. This strategy works very well with all kinds of illiquid assets such as restricted stock, real estate, alternative investments, or other long-term appreciated assets. Given the complexities these assets tend to present, you should talk to your lawyer, tax advisor, or financial professional before making a contribution.

Finally, if you are 70 1/2, consider making a qualified charitable distribution (QCD) from your IRA. Such a contribution fulfills charitable goals and allows you to withdraw funds from your IRA tax free. You do not get a charitable deduction for such contributions, but the QCD can be used to satisfy your RMD.