I know it is early in the year, but due to a couple of stock sales I have a fairly large (for me) realized capital gain for 2022, in addition to dividend income and my small salary. I am thinking about the possibility of opening a charitable fund account with the idea that I might be able to make a tax deductible donation to offset, to the degree possible, some of my tax for this year. Has there been a thread talking about this? Also, for those who have used such a strategy, have you had a good experience with one of the bigger discount brokers, Fidelity, Schwab, or Vanguard? Thanks for any direction that you can give.
SBN
Donor Advised Fund (DAF)?
Donating long term appreciated stock allows schedule A deduction without realizing the income. Deduction is limited to 30% of income and any excess can be carried over. Cash donations have a higher limit on deductibility. I believe, the limit for cash is 60%.
The broker issues a statement for the value for the day of donation which makes filing taxes easy.
This works best if you are all already itemizing or close to itemizing. We did this in the two years that I had high medical expenses.
Allows for bunching the deduction for donations and making the actual donations on your schedule. Many of the charities accept DAF donations by ETF. Some of the smaller ones require the DAF to issue a check and occasionally checks arenât cashed. After the specified time, uncleared checks are automatically credited back.
We are using Fidelity. Any of the brokers you listed will have an equivalent DAF.
The drawbacks: 1.) Charities have to be approved by the broker. 2) Minimum donation amount
The charities to which we routinely donate have all submitted documentation and are approved.
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I know it is early in the year, but due to a couple of stock sales I have a fairly large (for me) realized capital gain for 2022, in addition to dividend income and my small salary. I am thinking about the possibility of opening a charitable fund account with the idea that I might be able to make a tax deductible donation to offset, to the degree possible, some of my tax for this year. Has there been a thread talking about this?
Well, since you already realized the capital gains, youâve actually missed a large opportunity when making donations. If you had donated the appreciated stock, you would have been able to take the appreciated value of the stock as a Schedule A deduction, and since you didnât actually sell the stock, you wouldnât have any capital gains that you would have to recognize as income. Since youâve already realized the capital gains, that ship has sailed. Now, you are required to realize that capital gain as income on your tax return.
To partially offset some of your income, you can make donations to one or more charities, potentially including a Donor Advised Fund (DAF). A DAF is a fund set up with an administrator where you can take an immediate deduction for the cash donation, but then you can let the money sit in the DAF for future charitable giving. (The gift is irrevocable - you or your heirs have to give it to charity, so once you give it, itâs gone.) DAFs are generally treated as âpublic charitiesâ so you run into the same AGI limits as if you were giving to most other 501(c)3 organizations - you canât deduct more than 60% of cash gifts, or 30% of non-cash (i.e. appreciated stock) gifts. (For 2020 and 2021, some of these limits were lifted by the CARES Act.)
If your âdividend income and small salaryâ are significantly less than the capital gain you realized, you may have an issue in significantly offsetting your capital gain income because of the 60% limit. Additionally, given that Schedule A deductions must be over the standard deduction in order to get a benefit from itemizing your deductions, that may also limit your ability to use charitable deductions to offset your capital gain income.
Also, for those who have used such a strategy, have you had a good experience with one of the bigger discount brokers, Fidelity, Schwab, or Vanguard?
I would suggest looking a daffy.org in addition to brokerages. The fees for daffy can be considerably less than the fees that brokerages charge, especially for small accounts.
I would also point out that once you give money to the DAF, while you can direct where you want the money to go, the administrator has the final say. In general, if the charity is an approved 501(c)3 organization, you should be able to direct the money to them, but the administrator may require some type of vetting. Additionally, some administrators require that you give a certain amount in a given timeframe, and if you fail to do so, they will donate the money for you. So be sure you understand and can live with the administratorâs rules on vetting and giving before you sign up with that administrator.
AJ
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As AJ pointed out you have lost the tax advantage of donating appreciated holdings already sold. But there is one other approach that actually is a bit more tax efficient than a Donor Advised Fund â that is a Qualified Charitable Donation. You need to be over age 70 and make the donation directly from an IRA.
Read the fine print before you act on this process.
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As pointed out, you missed the change to direct donate stock shares. I looked at DAF years ago but was turned off by the fees. I just directly donate stock to charities, involves a little paperwork but no big hassle.
JLC
You need to be over age 70 and make the donation directly from an IRA.
70 1/2 not 70.
Originally, it was the age required for RMDs. When RMD age was raised to 72, the age for QCDs wasnât changed.
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I looked at DAF years ago but was turned off by the fees.
Which is why I like daffy.org They charge as little as $3/month, or $36 a year. On the other hand, Schwab and Fidelity charge a minimum of $100 a year, or 0.6% of the account balance, whichever is more. And Vanguard requires a minimum donation of $500k. Hereâs an article comparing the 3 brokerages mentioned, as well as giving some information about how DAFs work https://www.nerdwallet.com/article/taxes/donor-advised-fundsâŚ
AJ
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As AJ pointed out you have lost the tax advantage of donating appreciated holdings already sold. But there is one other approach that actually is a bit more tax efficient than a Donor Advised Fund â that is a Qualified Charitable Donation. You need to be over age 70 and make the donation directly from an IRA.
Read the fine print before you act on this process.
I would point out that the QCD is âtax efficientâ in a different sort of way, and not what I think the OP is looking to accomplish. The QCD - which stands for Qualified Charitable DISTRIBUTION, is not deductible, and does not lower your taxable income. You do not get a charitable deduction, but the IRA distribution is not included in your gross income. You donât get a double tax benefit. The QCD is essentially a wash, but the QCD will count towards your RMD for the year.
Bill
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A QCD can keep your income down, helping with Soc sec benefits taxation or with IRMAA rates for Medicare. Theyâre also good for people who donât itemize, or who wouldnât itemize without charitable contributions.
âPeter
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So, why not just pay the tax when due - say 21% of the gain and put the remaining 70%+ in a ROTH account since you have a âsmall salaryâ? Of course, if you have an urgent desire to give to charity - thatâs a commendable thing to do, but an even bigger contribution down the road would also be nice.
Iâm occasionally wondered about people that avoid tax on capital gains that at the same time are giving up a huge percentage of after-tax gain. At best, it seems like a curious thing to do.
So, why not just pay the tax when due - say 21% of the gain and put the remaining 70%+ in a ROTH account since you have a âsmall salaryâ?
Sorry, thatâs not going to work. Presumably, since the OP is concerned about the additional capital gains income, the gains are in a taxable account. (If the gains were in a retirement account, there shouldnât be any concern about capital gains, since retirement accounts are like Vegas - whatâs in them stays in them.)
You canât just âput the remaining 70%+â of a gain from a taxable account into a Roth account. You are limited to a $6,000 ($7,000 if 50 or older) contribution each year. Right now, if the OP hasnât made an IRA contribution for 2021, they could make contributions for both 2021 and 2022, but thatâs still only $12,000 ($14,000 if 50 or older).
AJ
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So, why not just pay the tax when due - say 21% of the gain and put the remaining
Plus state tax, IRMAA penalties for Medicare, any additional federal taxes due to high income, etcâŚ
70%+ in a ROTH account since you have a âsmall salaryâ?
Contributions to a ROTH are going to be limited by MAGI and not just by the âsmallâ salary. Backdoor ROTH might still be an option but still very limited on total amount.
Iâm occasionally wondered about people that avoid tax on capital gains that at the same time are giving up a huge percentage of after-tax gain. At best, it seems like a curious thing to do.
Current tax break plus not declaring income for the capital gains is a definite immediate benefit. We used it over two years that I had high medical expenses and was converting after-tax component of a 401K to a ROTH 401K which will now be rolled over to a ROTH IRA.
Now we donât itemize. Except for a few small donations, donations are from the DAF. Investments are having a rough start to this year but for the past few years donations have been from tax free appreciation within the DAF.
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Donât forget that donating highly appreciated stock to charity pays a premium. You deduct the full value of the donation (up to limits) and donât pay capital gains (15% + 6%), but the deduction reduces income that would have paid 24%+6%âa nice bonus depending on the details.
In daffy, if you wish to donate appreciated securities, you need to be a Benefactor, for which the fee is $20/month. The $3/month Contributor allows only cash or credit card contributions.
So depending on what your balance is the big 3 discount brokersâ DAFs may cost less.
Another difference I noticed was, daffy allows you to contribute and invest in crypto. Daffy has its origins in Silicon Valley and seems more geared to their sensibilities, in its design and presentation, including a phone app. The big 3 seemed more attuned to boomers.
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Daffy has its origins in Silicon Valley and seems more geared to their sensibilities, in its design and presentation, including a phone app. The big 3 seemed more attuned to boomers.
Sort of like Robin Hood compared to ânormalâ brokers.
There is also a convenience factor in having the DAF with your (or one of your brokers).
In daffy, if you wish to donate appreciated securities, you need to be a Benefactor, for which the fee is $20/month. The $3/month Contributor allows only cash or credit card contributions.
The Contributor level appears to allow stocks to be donated, at least once https://daffy.org/membership
Set up recurring contributions with a linked bank accountâor make one-time contributions with your linked bank account, a credit or debit card through Apple Payâ˘, publicly traded stocks, and crypto-assets.
AJ
And in addition to the deduction, QCDs do not increase the MAGI used to determine high income fees for Medicare premiums. While these fees do not apply to the average medicare recipient, I suspect they are a consideration for some.
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In daffy, if you wish to donate appreciated securities, you need to be a Benefactor, for which the fee is $20/month. The $3/month Contributor allows only cash or credit card contributions.
As an FYI, Daffy support told me:
In summary, as a Contributor members can make as many stock contributions as they want up to $25k cumulatively in crypto, stock, or DAF transfers. Once the member crosses $25k they will be automatically moved to the Benefactor Tier. Users donât have to do anything special to change tiers, we handle it automatically.
So, if you are just comparing the annual fee amounts, for total contributions less than $25k, Daffy would be $36 ($3/month at the Contributor level), and then it jumps to $240 ($20/month at the Benefactor level). For account balances of less than $500k, Fidelity and Schwab both charge $100 or 0.6% of the account balance, whichever is greater (0.6% of $16,666.67 = $100). So my take on it is, assuming that your outbound donations are approximately offset by growth* in your account:
Daffy will have cheaper annual fees for up to $25k of inbound contributions
From $25k - $40k of inbound contributions, Fidelity or Schwab will have cheaper annual fees
For over $40k of inbound contributions, Daffy has cheaper annual fees
*YMMV - I just chose a relatively simple case as an illustration. You would need to figure your own numbers based on how you plan to use the DAF.
I would point out that anyone considering a DAF should also include the costs of the investments themselves, since the investment options can range from as low as 0.015% up to nearly 1%, depending on which investment options you choose. Additionally, be sure that the DAF you choose will accept the asset(s) that you want to donate.
AJ
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