Year-end strategies for charitable giving

During the holiday season, many people look for ways to combine their desire to help causes they believe in with their desire to save on taxes.

Generally, if you itemize your deductions, making charitable contributions can decrease your tax bill, and since high‐income earners generally pay tax at higher rates, they may enjoy a particularly large tax benefit from charitable contributions.

Here are 6 strategies to consider that can help you make the most of your giving this year.

1. Give long-term appreciated securities, rather than cash
Donations made by cash or check are, by far, the most common methods of charitable giving. However, contributing stocks, bonds, or mutual funds that have appreciated over time has become increasingly popular in recent years, and for good reason.1

Most publicly traded securities may be donated to a public charity. If the security has been held for more than one year when the donation is made, the donor can claim the fair market value as an itemized deduction on their federal income tax return (assuming they itemize their deductions). The amount deducted in a single year can be up to 30% of the donor’s adjusted gross income (AGI). Other types of securities, such as restricted or privately traded securities, may also be deductible, but additional requirements and limitations may apply. No capital gains taxes are owed when the securities are donated, not sold.

Often, people who receive compensation in the form of their employer’s stock can carry a sizable exposure to that company. Gifting shares of company stock can help satisfy your philanthropic goals as well as the common goal to diversify your portfolio, all while managing the impact on your capital gains tax.

2. Consider a bunching strategy from year to year
The 2017 tax laws simplified tax filing for many people by increasing the standard deduction and capping many itemized deductions. But since that means some filers who used to itemize may no longer need to do so, it became difficult for those filers to get a tax deduction for their charitable contributions.

To make the most of the potential tax deductions, consider “bunching.” That means concentrating deductions in a single year, then skipping one or even several years. This strategy can work well when your total itemized deductions for a single year fall below the standard deduction: Charitable contributions for several years made at once may allow the total of itemized deductions to exceed the standard deduction, making it possible to obtain a tax deduction for at least part of the charitable contributions. The catch is that this strategy requires having the financial capacity to pack more than year’s worth of your contributions into a single year.

3. Consider establishing a donor-advised fund
A donor-advised fund (DAF) is a giving vehicle sponsored by a public charity. It allows donors to make a charitable contribution to the public charity, receive an immediate tax deduction, and then recommend grants from the fund to a variety of other charities over time. Donors can contribute to the charity as frequently as they like and then recommend grants to their favorite charities whenever it makes sense for them. There are a number of public charities, including Fidelity Charitable®Opens in a new window, that sponsor DAFs. The Fidelity Charitable Giving Account® has no minimum initial contribution requirement and one of the lowest annual fees of any donor-advised fund. Once opened and funded, you can then recommend grants to other eligible charities—generally speaking, IRS‐qualified 501(c)(3) public charities—from your DAF.

Establishing a DAF allows you to make a gift and qualify for a charitable deduction immediately without needing to decide, until you’re ready, on the charities to support with grant recommendations. It can also be a great way for charitably inclined individuals to offset a year with unexpectedly high earnings, or to address the tax implications of year‐end bonuses or stock option exercises. In addition, once donated to the DAF, assets can be invested and earn returns without being taxed.

4. Consider using a charitable donation to offset the tax costs of converting a traditional IRA to a Roth IRA
One way to potentially reduce future taxes is to convert a portion of your traditional IRA assets into Roth IRAs. To help offset the tax cost of a Roth IRA conversion, consider making a charitable contribution. The essential difference between traditional retirement savings vehicles (whether they’re IRAs or workplace plans) and the Roth versions is that with traditional IRAs, contributions are usually tax-deductible the year they are made and can grow tax-deferred within the account. The contributions and earnings are then taxed upon withdrawal.

Roth IRA contributions are not tax-deductible. You can make withdrawals from your Roth IRA anytime, tax- and penalty-free, if you meet certain requirements: These are called “qualified withdrawals.” Be aware, however, that you may have to pay taxes and/or penalties on nonqualified withdrawals from a Roth IRA that go beyond your accumulated contributions, and that includes withdrawals of converted balances.2

Roth accounts may make sense if you believe your current tax rate is lower than it will be in the years you’ll make withdrawals; however, there are many other factors to consider. (For more on Roth conversions, read Viewpoints on Fidelity.com: Tax-savvy Roth IRA conversions)

Converting in a year in which you can claim a large tax deduction, such as an itemized charitable deduction, can be helpful in offsetting the taxes due to the Roth conversion and may give you an opportunity to give to a charity while also reducing your future taxes.

5. Consider donating complex assets
Donors may also contribute complex and illiquid assets—such as private company stock, restricted stock, real estate, alternative investments, cryptocy (such as bitcoin), or other long-term appreciated property—directly to charity. The process for making this type of donation requires more time and effort than donating cash or publicly traded securities, but it has distinct advantages. These types of assets often have a relatively low cost basis. In fact, for entrepreneurs who have founded their own companies, the cost basis of their private C-corp or S-corp stock may effectively be zero.

Contributing non-publicly traded assets to charity, however, involves additional laws and regulations, so investors should consult their legal, tax, or financial professional. Also, not all charities have the administrative resources to accept and liquidate such assets. But many public charities with DAF programs, such as Fidelity Charitable, are able to accept these assets and can work with investors and their financial professionals, providing them with guidance throughout the process. (For more on DAFs, read Viewpoints on Fidelity.com: Strategic giving: Think beyond cash)

6. Over 72? Consider a Qualified Charitable Distribution (QCD) from an IRA
If you are at least age 72,3 have an IRA, and plan to donate to charity this year, another consideration may be to make a QCD from your IRA. This action can satisfy charitable goals and allows funds to be withdrawn from an IRA without any tax consequences. A QCD can also be used to satisfy your required minimum distribution (RMD)—up to $100,000.

QCDs may be particularly appealing if you have few other itemized deductions or if you are already close to your charitable deduction limitations. Because the tax-free QCD is never reported as income or as a deduction, it is not counted against the charitable limits and does not require itemization to be effective.

So if you are subject to an RMD, don’t need the funds, and would face increased income tax liabilities if you took the entire RMD, a QCD can yield both a good tax and philanthropic result.

Tip: DAF sponsors such as Fidelity Charitable are not eligible recipients for QCDs, even though they are public charities. Seek professional advice about QCDs, and visit Fidelity’s Learning Center for more on QCDs.

In addition to the six strategies outlined above, through the end of 2021, the CARES Act provides a couple of additional possibilities: You could consider a strategy from a CARES Act provision that allows individuals who don’t itemize to claim a deduction for a charitable cash contribution up to $300 ($600 for those married filing jointly). In addition, for those who do itemize and are planning on very large cash gifts, the CARES Act has temporarily raised the annual limit on charitable deductions from 60% to 100% of their AGI. (Donor-advised fund sponsors, supporting organizations, and private foundations are not qualifying charities under this CARES Act extended provision.)

Before undertaking any of these giving strategies, you should consult your legal, tax, or financial professional. But each of the strategies, properly employed, represents a tax‐advantaged way for you to give more to your favorite charities.