Philanthropy and Your Taxes: Doing Well by Doing Good

Some of the nation’s wealthiest families and individuals are among the most philanthropically inclined. Understanding that they did not achieve their level of success without a supporting cast, many families believe that it is important to give back to the communities and causes that are nearest to their hearts.

The following are a few tax-related strategies to consider to ensure that you are doing well by doing good:

Don’t Cash in Appreciated Equities. Transfer.

An important consideration is how you approach your investments before you make any contributions.

If you sell stocks and other investments, then donate the cash, the IRS will hit you for the taxes on any capital gains. Instead, you can transfer these securities, which may include stocks and mutual funds, directly to a charity. Donations of “Qualified Appreciated Securities” (QAS), which are publically traded securities traded on an established securities market, are valued at Fair Market Value (FMV) on the date of transfer. These securities are deductible up to 30% of Adjusted Gross Income (AGI) if made to a public charity and up to 20% of AGI if made to a Non-operating Private Foundation (NOPF).  The securities must be held for a long term holding period of more than one year.  Any charitable contribution in excess of the AGI limitations can be carried forward up to five years.

Please note that securities not meeting the definition of a QAS would not automatically receive a full FMV deduction without a formal appraisal. Other restrictions apply when donating these other securities to a NOPF. Therefore, before donating these other securities, which include privately held securities and publically traded partnership interests consult your Anchin advisor with specific knowledge of the rules.

Donor-Advised Funds (DAFs)

These are registered charitable organizations, which must be public charities and that are funded in various ways: appreciated securities, cash and other assets with value. Contributions are made directly to an account in the donor’s name and held by a fund sponsor. Recommendations as to how the DAF should disburse the funds to your favorite charities are made to the fund administrator who will generally adhere to your advice.

The primary advantage of DAFs is that they provide a current tax deduction for funds that may not be disbursed to a charity until months or years later. Donors receive an immediate tax deduction of up to 60% of adjusted gross income for cash gifts and a fair market value deduction of up to 30% of adjusted gross income for contributions of appreciated securities, mutual funds, real estate and other assets, and can enjoy a five-year carry-forward deduction on gifts that exceed AGI limits.  A donor must keep in mind that they usually relinquish all legal control of contributions to the DAF sponsor, however the donor retains advisory privileges on how the money is invested and which charities receive the contributions.

DAFs also provide the ability to spread these charitable contributions, which are invested and growing tax-free, over several years and across different charities. Although in addition, they allow an individual to merge several tax deductible gifts into one tax year, a concept known as bunching. This allows the taxpayer to itemized deductions in a year where they would otherwise be limited to the standard deduction.

For a more in-depth look at Donor Advised Funds, see our article: Donor-Advised Funds: Their Place in Today’s Climate

Private Non-Operating Foundations (PNOFs)

This type of foundation, also known as a Grant Making Foundation, has long been a hallmark of this nation’s philanthropic DNA. More Americans may remember the Rockefellers and Mellons for their humanitarian efforts rather than their business successes. These foundations offer individuals the opportunity to create legacy for generations.

Furthermore, they offer these financial benefits:

• Reduce personal income tax. A donor will receive a deduction for any cash amount contributed to a private foundation, up to 30% of the donor’s adjusted gross income.
• Capital Gains Tax Savings. Donors can avoid capital gains taxes by donating qualified appreciated securities to a private foundation. They will receive a FMV deduction up to 20% of the donor’s adjusted gross income.
• Savings on Estate Taxes. When investments and assets are donated to a private foundation, they are not counted toward the donor’s estate, and are exempt from estate taxes (federal and state).

Keep in mind that private foundations are legally required to give away at least 5% of their investment assets per year.  It is also worth mentioning that private foundations tend to incur more professional fees. This is due to the set up costs associated with the filing of the initial exemption application, together with annual return filings.

Considerations for cash giving in 2020

In deciding upon ones charitable giving in 2020, please be aware that the CARES Act increased the AGI limitation from 60% to 100% for cash contributions by an individual taxpayer to a 501(c)(3) public charity. Cash contributions to NPOFs may qualify for the 100% AGI limitation in certain circumstances. However, DAFs are not considered qualified organizations for this purpose.

While many charitable gifts are made during the fourth quarter, advisors should have conversations with their clients about relevant tax strategies throughout the year.   To discuss philanthropic alternatives and their tax implications in greater detail, please contact your Anchin relationship partner or Vincent Gatto, a Director in Anchin Private Client, at 212-536-6973 or [email protected].