Outside the Gift Box, Year-End Giving Strategies
Outside the Gift Box, Year-End Giving Strategies
As we approach the end of the year, it’s a good time to consider making holiday charitable gifts – which might come in handy during tax season. In addition to the usual year-end strategies, you might look a bit outside the gift box for donation ideas.
For example, approximately $16 billion dollars’ worth of credit card rewards points go unused each year by credit card holders. Imagine if those rewards were donated to charities? Many rewards programs will allow you to donate your awards directly to established charities via their website. However, bear in mind that utilizing this convenient transfer strategy will not qualify as a taxable donation. To get the tax deduction, you’ll need to exchange rewards points for cash and then send the charitable donation yourself.
If you earn loyalty points in the form of airline miles, you can donate these as well. The Hero Miles Program, authorized as a component of the Department of Defense Authorization Act, enables donors to gift frequent flier miles from Alaska Airlines, American Airlines, Delta Air Lines, Frontier Airlines, United Airlines and US Airways to wounded, injured or ill military service members and their families. For more information, go to Fisherhouse.org (http://www.fisherhouse.org/programs/hero-miles). But bear in mind that here, too, the IRS does not permit donated frequent flier miles to be claimed as a charitable tax deduction.
Another alternative is to give the gift of fine art. A gift of valuable artwork to a museum or other charitable organization can qualify for a tax deduction. The value of the deduction differs depending on whether it is gifted while the owner is alive or as part of an estate after the owner passes away. While alive, the taxpayer can claim up to 30 percent of adjusted gross income based on the value of the work at the time of the gift. If donated after death, the donor’s estate will receive an estate tax deduction based on the artwork’s valuation at death.
Rather than getting hit with capital gains taxes, consider gifting highly appreciated shares of stock. If you’re looking to rebalance your portfolio by year’s end, you might save money by gifting shares in the amount you would normally donate to a charity. You will receive an immediate tax deduction on the full market value of the gift, plus save what you would’ve paid in capital gains taxes on the appreciated portion of the shares.
If you need help determining which securities to gift, consider stocks with the lowest cost basis, as these will save you the most in capital gains taxes. You can then use the cash you would have otherwise donated to the charity to repurchase the same stock. This strategy enables you to unload low cost-basis shares – and you don’t have to worry about the 60-day wash sale rule. By gifting long-term appreciated shares, you not only benefit from a potentially higher tax deduction, but your gift will be worth more than what you originally paid for it.
If you’re considering unloading shares that have lost value, it’s better to sell them first and use the proceeds to make a direct cash donation. This way, you can claim the capital loss on your tax return as well as receive the tax deduction for the gift. The combination of the two tax deductions might even cover your losses.
Some people make charitable gifts depending on their income that year – in good years they make donations, in bad years they either don’t gift or give a reduced amount. While that might work for your budget, consider how difficult it is for charities to maintain their operations with this type of variable and uncertain income.
To enable you to make regular donations every year, consider making a large donation (in a flush year) to a donor advised fund. A DAF works like a professionally managed mutual fund. Your donation is combined with others and the fund manager makes day-to-day investment decisions. You can then can make annual grants to the qualified charities of your choosing, essentially creating a legacy instead of a one-time donation. This strategy positions a large donation to grow over time, allowing for smaller but consistent gifts each year. With a DAF, you’ll receive an immediate tax deduction (subject to income limitations) on your initial irrevocable contribution of cash or marketable securities.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.