In 2024, a remarkable year for the market, investors have found themselves in a position of abundance. As the S&P 500 index experiences a staggering 26% increase, individuals are not only benefitting from their financial gains but also reevaluating their approaches to philanthropy in light of this prosperity. With Giving Tuesday emerging shortly after Cyber Monday, it provides the perfect opportunity for generous individuals to contemplate how to make their contributions more impactful.
The Value of Donating Appreciated Assets
The traditional notion of giving cash has shifted as savvy investors discover the advantages of donating appreciated assets. According to Brandon O’Neill, a charitable planning consultant at Fidelity Charitable, the trend has moved away from cash donations to non-cash assets like stocks and mutual funds, which comprised 63% of contributions to Fidelity in 2023. “If you gift an appreciated asset, not only do you get a tax deduction, you also avoid capital gains tax liability,” O’Neill explains. This tax strategy is particularly beneficial when assets are held for over a year before being donated.
By donating aggressively appreciated assets, donors maximize their tax deductions. For instance, if a donor contributes stock that has significantly increased in value, they can write off the fair market value for tax purposes, representing a considerable advantage compared to the original purchase price. The IRS allows individuals who itemize their deductions to write off contributions, benefiting significantly those whose itemized deductions surpass the standard deduction limit—$14,600 for single filers and $29,200 for married couples filing jointly in 2024.
Capital Gains Tax: What You Should Know
A major aspect of charitable giving is avoiding the hefty capital gains taxes that arise from selling appreciated assets. When an investor sells a stock and realizes the gain, they are liable for capital gains taxes on the appreciation. However, by choosing to donate that stock, they bypass this tax altogether. The donation acts as a double win; the charity receives a more valuable asset, and the donor can claim a higher deduction without incurring taxes.
For example, if an investor holds shares in companies like Palantir Technologies and Vistra Corp., which have seen increases of over 300% this year, the decision to donate shares rather than sell them could lead to substantial savings. The tax implications of charitable giving should not be underestimated, especially in a thriving market where the potential for appreciation is enormous.
Aside from the tax benefits, donating appreciated assets can enhance an investor’s portfolio management strategy. As shares appreciate, they can inadvertently lead to over-concentration in certain stocks, increasing risk exposure. By donating these stocks, investors can strategically rebalance their portfolios. Christine Benz from Morningstar emphasizes that donations can mitigate the risks associated with employer stocks, prevalent in many employee portfolios. “Donating employer stock can help diversify risk and reduce overall concentration in higher-risk assets,” she notes.
Additionally, it presents an effective mechanism to align financial wealth with philanthropic goals, allowing investors to enact social change while optimizing their portfolios.
Innovative Giving Strategies: Bunching and QCDs
With the high standard deduction, many donors are turning to innovative strategies like “bunching” gifts together to maximize tax efficiency. Instead of contributing smaller amounts annually, donors can couple several years’ worth of donations into a single year, enhancing itemized deductions. This strategy enables large contributions to donor-advised funds, streamlining giving processes and allowing donors to distribute grants among various charities selectively.
A separate avenue worth exploring, particularly for those over 70 1/2 years old, is the Qualified Charitable Distribution (QCD). This method allows individuals to donate directly from their IRAs without incurring taxes on the withdrawal, as long as the funds are sent directly to an eligible charity. This approach not only benefits the charities but aids in reducing the tax burden of Required Minimum Distributions (RMDs) in subsequent years, preserving more wealth for future generations.
The trend of charitable giving is continuously evolving, particularly in the wake of a flourishing market. Investors need to reevaluate their entire approach to philanthropy, harnessing the power of appreciated assets, understanding the tax implications, and crafting strategies that maximize both financial and social impact.
As Giving Tuesday approaches, the conversation surrounding these strategies becomes even more critical. By considering different methodologies of giving, investors can significantly enhance their philanthropic efforts while simultaneously enjoying the benefits that come with prudent financial planning in a prosperous year. The opportunity to align personal financial success with meaningful contributions has never been more promising, and embracing this can lead to a more fulfilling philanthropic journey.