What Uncle Sam Taketh Away, You Can Give Back (and Get a Tax Deduction)

Kathleen M. Fisher

By Kathleen Fisher (pictured) and Tara Thompson Popernik

The government shutdown, now in its second week, has temporarily stopped the flow of government funding for many worthy organizations and may strain the resources of others. Federal grant administration is being delayed. For example, the grant administration staff at the National Institutes of Health has been furloughed; that may stop or slow grants for medical research. Federally funded nutrition programs are facing interruptions, which may increase demand for local social-services charities. Any donations you make now will mean more than ever to charitable organizations. And with federal tax rates up this year, your gift can save you more on your tax bill.

Charitable giving remains one of the few ways you can avoid taxes outright. While the new rules under the American Taxpayer Relief Act have reinstated a limit on itemized deductions for high-income taxpayers, the increase in the top tax bracket has also made charitable deductions more valuable (Display). A $1,000 cash gift this year provides a larger deduction than the same gift would have in 2012.

A gift of cash to a public charity can offset as much as 50% of your adjusted gross income (AGI) for the year in which the gift is made. (AGI is total gross income minus certain business expenses and other specific items.) Gifts of appreciated assets can offset up to 30% of your AGI. Any charitable deduction that surpasses this year’s AGI threshold can be carried forward for up to five additional years.

In most cases, you will be better off donating appreciated securities rather than writing a check. If you’ve held the securities for more than a year, you’ll receive a charitable income-tax deduction for the current value of the securities and avoid paying tax on the capital gain.

Generally speaking, however, you won’t want to donate appreciated stock held for less than one year, because the deduction will be equal to the cost basis, not the current value. On the other hand, if the current value of the securities is below the purchase price, it is usually better to sell them and donate the proceeds. This way, you can realize a loss and use it to offset gains elsewhere.

If you are over the age of 70½ and have an Individual Retirement Account (IRA), there’s another charitable-giving alternative to consider. Until December 31, 2013, you can contribute up to $100,000 from your IRA to charity.

This direct rollover, which will not result in any tax or tax deduction, will qualify as part of your required minimum distribution (RMD) for the year if you need to take it but have not already done so. Because the distribution is excluded from gross income, the gift may reduce your income enough to bring you below one of the tax thresholds. Still, donating appreciated securities from your taxable portfolio may be preferable.

At a time when charitable giving is so important, it is important to determine which assets are the most efficient to gift, as well as assess which strategies for implementation (outright gifts, donor-advised funds, private foundations, or trust vehicles) could have the highest impact now and in the future.

The views expressed herein do not constitute, and should not be considered to be, legal or tax advice. The tax rules are complicated, and their impact on a particular individual may differ depending on the individual’s specific circumstances. Please consult with your legal or tax advisor regarding your specific situation.

Kathleen M. Fisher is Head of the Wealth Management Group at Bernstein Global Wealth Management, a unit of AllianceBernstein. Tara Thompson Popernik is the Group’s Director of Research.

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