By Brian Ellenbecker CFP®, EA®, CPWA®, CIMA®, CLTC®
Donating Appreciated Stock vs. Using a Qualified Charitable Distribution – which option is right for you?
For charitably inclined individuals, there are an abundance of options available to donate money to charity while also maximizing the tax benefit. Two of the most popular options are donating appreciated stock and making a qualified charitable distribution from your IRA. Which of these options is right for you?
Before we discuss the appropriateness of each technique, it’s important to understand the key aspects of each technique.
Qualified Charitable Distributions (QCDs)
- Up to $100,000 per IRA owner can be contributed directly from an IRA to charity
- The distribution counts towards the IRA owner’s Required Minimum Distribution (RMD) for the year.
- To be considered a QCD, the following conditions must be met:
- The IRA account holder must be age 70½ or older as of the date of the distribution.
- The distribution must be made to a public charity
- Donor-advised funds, private foundations, and supporting organizations do not qualify.
- The payment would have to otherwise qualify as a charitable contribution.
- The distribution must be a direct transfer from the IRA trustee to the charity.
- It cannot be a reimbursement to the IRA owner for gifts made from other funds.
- The taxpayer neither reports the income as part of AGI nor claims a charitable deduction.
- QCDs are not automatically reported by the IRA custodian.
- 1099-Rs do not include information on QCDs. It’s important to notify your tax preparer that you did a QCD to ensure you receive the tax benefit. Otherwise, they will have no way of knowing you did one.
- To report a QCD on your Form 1040 tax return, generally report the full amount of your IRA distributions on Line 4a. On line 4b, enter only the taxable amount (line 4a less QCDs and any other non-taxable amounts) and enter “QCD” next to this line.
Donating Appreciated Securities
- Donating appreciated securities is often preferable to donating cash. For securities held for more than one year (366 days or more), not only do you potentially receive a charitable deduction for the market value, you also avoid paying tax on the capital gain.
- If the security is held for one year or less, the deduction is limited to the cost basis of the investment.
- If you want to donate a security that is at a loss, it’s better to sell the stock first, realize the tax loss, then donate the cash.
- To receive the tax benefit, you must itemize your deductions. In addition, if the charitable donation itself is the expense that pushes you over the standard deduction amount, only the portion that exceeds the standard deduction is deductible.
- The maximum amount that can be deducted when donating appreciated securities is limited to 30% of your Adjusted Gross Income (AGI) or 20% when donating to certain entities like private foundations.
Choosing Between QCDs or Donating Appreciated Securities
Using a QCD is generally more appealing than donating cash, however, it may be inferior to donating appreciated securities from the portfolio.
On the surface, donating appreciated securities looks like a slam dunk strategy. There are numerous advantages, including:
- Providing a double tax benefit—you can deduct the market value as a charitable deduction AND you avoid paying tax on the capital gain.
- Typically, the larger the embedded gain in the security you donate, the greater the advantage to donating that appreciated security vs. using a QCD.
- Appreciated securities can be contributed to a donor advised fund, a charitable trust, or a private foundation. QCDs are not permitted to be made to these entities.
There are situations where the benefit of a QCD outweighs the benefit of donating appreciated stock, however. If any of the below situations apply, consider using a QCD for at least a portion of your charitable gifts.
- You are taking the standard deduction.
- At least a portion of your charitable expenses will be used to push you above the standard deduction amount. Only the portion of charitable expenses that exceed the standard deduction amount, when combined with other deductible expenses, provide a tax benefit.
- If you don’t itemize your deductions, you will not get any tax benefit from making a charitable contribution.
- In 2021, non-itemizers can deduct $300 of charitable gifts ($600 for if you’re married filing jointly). This is a temporary tax benefit from the Consolidated Appropriates Act of 2021 and is set to expire at the end of this year.
- If the added income from the RMD triggers other tax consequences, such as:
- Causing more of your Social Security to be taxed.
- Subjects you to higher Medicare premiums due to IRMAA.
- Reduces AGI-based deductions like medical expenses.
- Reduces or eliminates tax credits that are income-based.
- Subjecting investment income to the 3.8% Medicare surtax on net investment income.
- The size of your gift of appreciated securities exceeds the 30% AGI deductibility limit.
- The excess amount can carry over for up to five years.
- Consider using a QCD for the charitable gift more than the deductibility limit to avoid needing to carryover the deduction.
It’s important to remember that any charitable planning strategy should only be implemented if you already plan to donate to charity. If you are not charitably inclined, you are better off financially by not donating to charity, keeping the money or income for yourself, and forgoing any tax deduction.
Be sure your charitable giving strategy coordinates with other aspects of your financial plan, like your estate plan and income tax plan. Work closely with your Shakespeare financial planner to ensure all phases of your financial life are managed as a cohesive strategy.