Benefits for donors and charities
Making an IRA charitable contribution or donating appreciated securities can be strategic for donors seeking to maximize their charitable impact while reducing their tax liabilities. Although there are distinct differences between the two approaches, there is one clear area of common ground: Charities you support using these savvy methods also benefit because it may be possible to make a larger charitable contribution due to the added tax advantages compared to giving cash.
Who can benefit? IRA charitable contributions, or QCDs, benefit donors who don’t want to take their required minimum distribution from an IRA, which are mandatory starting at age 70½. Donations of appreciated securities held for more than a year, in contrast, can provide tax benefits to donors of any age and are not subject to the $100,000 cap for IRA charitable rollovers.
What are the tax advantages? An IRA charitable contribution allows you to meet your RMD requirements without adding to your taxable income. This can potentially keep you in a lower tax bracket and allow you to avoid phaseouts of certain tax deductions that can increase your tax liability.
A donation of appreciated securities, however, also can reduce your taxable income since the full fair-market value of the stock can typically be deducted up to IRS limits. On top of that, donations of appreciated securities allow you to eliminate the capital gains tax that would otherwise be owed when those securities are sold—allowing you to give up to 20 percent more compared with selling the asset first and then donating the proceeds.
In addition, donations of appreciated securities can go to certain kinds of charitable organizations, such as donor-advised funds and private foundations, that aren’t allowed for IRA charitable contributions. Donations of securities to a private foundation are tax deductible to a limit of 20 percent of your adjusted gross income. Gifts of appreciated securities to a donor-advised fund, for example, are deductible up to 30 percent of your adjusted gross income. Donations in excess of that limit may be carried forward for up to five tax years, provided the securities had been held for more than a year before they were given.
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