Tax-Efficient Ways to Make Charitable Donations

Mike Piper, The Oblivious Investor writes: In many cases, there is a more tax-efficient way to do your charitable giving than simply writing a check for the desired amount to the desired charity. Two primary strategies to consider are:

• Donating appreciated securities from a taxable account, or
• Making qualified charitable distributions from an IRA.

Donating Appreciated Securities

When you make a donation, to a qualified charitable organization, of assets that, if you sold them, would qualify for a long-term capital gain, you (in most cases) not only get to claim a deduction for the fair market value of the assets, you also get to avoid paying tax on the capital gain.

The benefit here is straightforward: Because you get to completely avoid paying tax on the gain, using long-term-capital-gain assets for charitable contributions typically makes more sense than using such assets to pay for living expenses (and paying tax on the gains when you liquidate them) and using other assets to fund charitable contributions.

Qualified Charitable Distributions

If you’re age 70.5 or older, you have another option: Do your giving this year via a “qualified charitable distribution.” A qualified charitable distribution is a distribution from a traditional IRA made directly to a qualified charitable organization. Unlike most distributions from an IRA, qualified charitable distributions are excluded from your gross income. (You do not, however, get an additional deduction for the donation.)

In addition to the age requirement — you must be 70.5 or older — there are two important restrictions to be aware of:

• 2013 is the last year that this tax break will be allowed (unless of course Congress decides to extend the provision again), and
• The exclusion from gross income is limited to $100,000 per year.

The big benefit here relative to simply writing a check to the charity of your choosing is that you get to use the full pre-tax value of the IRA assets for your donation.

An additional benefit is that this is an exclusion from gross income rather than an itemized deduction (which is what you would ordinarily get for a charitable donation). This is relevant because it means that:

• This income will not be included in your adjusted gross income (which plays a role in determining many things such as how much of your Social Security benefits will be taxable and whether you qualify for numerous credits/deductions), and
• You can take advantage of this tax break even if you use the standard deduction.

A final benefit is that qualified charitable distributions can count toward your RMD for the year.