There have been a lot of articles written this year about maximizing your tax benefits around charitable gifting, and while we encourage you to read them and discuss different strategies with your tax advisor to see what works best for you, this is more of a grasshopper and the ant story. For those who need a quick recap of the old fable, the ant took time to prepare for the winter while the grasshopper did not and the grasshopper was left scrambling. But don’t worry, there is still time to be the ant in the story.
When gifting to charities, it’s important to keep in mind the tax benefits of gifting long-term appreciated securities (ex. stocks, bonds, mutual funds) over cash; when you gift a security with a long-term gain, you get to deduct the current value of the security as the gift, and don’t recognize the gain for tax purposes. So instead of selling a stock, recognizing a taxable gain, and gifting the resulting cash, you can gift the security directly and avoid the gain for taxes. If you choose to gift to a Donor Advised Fund (DAF), you could consider “lumping” your gifts, or gifting a few years’ worth of gifts in one tax year that would have a greater tax impact than other years. For example, if you are now going to take the standard deduction in future tax years because of the recent changes in the tax law, you could consider contributing, say, five years of giving in one tax year into a DAF to get to a level where you can itemize.
There can also be portfolio strategies for gifting a certain stock or mutual fund that go hand in hand with the tax benefits. If you have a stock that makes up a large portion of your portfolio, gifting shares may be a good way to reduce concentration risk in your portfolio without selling a stock. If a stock has a run up in value, gifting some shares is a way to lock in the gain without recognizing a gain by selling. These benefits are sometimes overlooked when tax planning, but can have a real impact on your portfolio strategy.
What some people don’t consider when discussing these strategies with their accountants in year-end planning is that waiting too long might take these strategies off the table. Different brokerage firms have different timelines for the last date they can process a gift and have it count for the current year. If you are planning on gifting a stock or mutual fund to a DAF or directly to a charity, the deadlines to make the contribution are probably earlier than you may think. If the security is held in an account at the same brokerage firm as your DAF, you typically can transfer it overnight. If it isn’t, it can take weeks or months to process. See the chart below for processing times for gifts of securities from outside firms to common DAF firms:
Keep in mind that if you haven’t opened an account yet that could take a few days as well. The dates above are recommended dates – sometimes firms can process the request after the dates given above – but the likelihood of having a gift count for the current year drops the longer you wait. Different charities may have their brokerage accounts at different firms, so it’s important to ask about their deadlines for gifting if you plan to make a gift.
If you have already talked to your accountant and know what you are going to gift, why wait until later in the year? Tax planning can and should be something to do throughout the year, not just at year-end. If you have a stock or mutual fund with a gain, why not get some risk off the table and lock in your gains in the gift, while also giving yourself plenty of time for the gift to be processed? If you wait too long, gifting stocks or mutual funds may no longer be an option. Checks are typically counted as long as they are postmarked by the end of the year and cash transfers have to be received in the account by the end of the day on the December 31, but as stated before, the tax benefit isn’t as great.
Remember to keep deadlines in mind so you can make your gift the way you want, while keeping all tax strategies on the table. Be sure to discuss your options with your tax advisor and don’t be afraid to act earlier than December. As always, Cassady Schiller is here to discuss any of your planning questions.
**This article is for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.