By Managing Director & Senior Advisor Jennifer Smiljanich, CFP®.
Giving to family members or charitable organizations is a highly personal decision, often tied with emotional strings. We make gifts aligned with our values, and our choice to give, or not to give, tells other people something about us. I have always felt a strong connection to Catholic Charities. In 1951, my father’s family emigrated to the United States from Germany with a few suitcases and a dream of a better life. His family received clothing from Catholic Charities to make their transition to America easier. Now I want to give that opportunity to someone else!
For some, gifting to family takes precedence over making donations to charity. Keep in mind that you may gift up to $17,000 per individual in 2023, without generating gift tax. Gifts can be made to individuals using cash or securities.[1] Various types of account structures, including 529 Plans, trusts, and Roth IRAs, may be used to help your loved ones accomplish their future goals, and your own.
In addition to family gifting, many individuals support giving to organizations that aim to help their communities. Below, we’ve highlighted some strategies to make the most of your giving dollars:
1. Consider making gifts using IRA dollars: for those age 70 ½ or older in 2023, you may request that your IRA custodian cut a check directly to a charity (called a qualified charitable distribution (QCD)). This strategy works well for individuals who cannot itemize deductions on their tax return. Each IRA dollar given to a qualified non-profit organization does not count as taxable income to the IRA owner. Additionally, for those taking required minimum distributions (RMDs), these donations can be used to satisfy your RMDs.[2]
2. Donate highly appreciated securities: if you are making a meaningful gift to a qualified charity, you may be able to donate a stock, mutual fund, or exchange traded fund (ETF) in kind. By doing so, you can avoid realizing the gain on the security at sale (and the resulting tax). The charity can sell the security and does not realize the gain if they are a qualified organization.[3] A win for both the giver and receiver! Consider this example of donating $50,000 of securities directly to charity:
3. Donor advised funds: these types of accounts can be held through a community foundation or custodian, including Schwab, Fidelity, and Vanguard. An individual can donate cash or securities to fund an account; using highly appreciated securities is most advantageous. At the time of funding, the donor receives a tax deduction up to the value of the securities / cash donated. The original securities are then sold and may be invested in other securities. Then, the donor may use the account to make donations all at once, or over time, to charitable organizations. There are some caveats - the receiving charity must be a legitimate qualified charity and the donor cannot use donor advised funds in a way that the donor receives some benefit (i.e. to pay for a gala dinner).[4] Unfortunately, a QCD from an IRA may not be directed to a donor advised fund.
4. Cash is always an option: for smaller gifts, one-time gifts, and gifts to smaller organizations that might not have a brokerage account to receive securities, cash might be the simplest and most effective option.
Finally, some states offer tax credits for charitable donations that might be used to help families paying private school tuition or to aid other charitable organizations. Tax credits reduce taxes due dollar-for-dollar. Ohio recently began a tax credit program to support scholarship granting organizations (such as some private schools), up to $750 per individual or $1,500 per married couple.[5] Arizona also offers tax credits for donations to selected charitable organizations and foster care organizations.[6]
We are available to help you, in coordination with your tax or estate professional, consider how to best accomplish your giving goals to family or to organizations aligned with your values. While gifts must be completed before December 31st to count for the current tax year, giving can be done throughout the year to support the people and causes that are near and dear to you.
Important Disclosure Information & Sources:
[1] “Frequently Asked Questions on Gift Taxes”. Internal Revenue Service, 2023, irs.gov.
[2] “IRA FAQs - Distributions (Withdrawals)”. Internal Revenue Service, 2023, irs.gov.
[3] “About Publication 526, Charitable Contributions”. Internal Revenue Service, 2023, irs.gov.
[4] “Donor-advised Funds”. Internal Revenue Service, 2023, irs.gov.
[5] “Scholarship Donation Credit”. Ohio Department of Taxation, 2023, tax.ohio.gov.
[6] “Credits for Contributions to QCOs and QFCOs”. Arizona Department of Revenue, 2023, azdor.gov.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice.
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