How to optimize your charitable planning

Making the occasional charitable donation does not typically require too much planning. When planning for larger or periodic donations, however, it is prudent to evaluate the options for funding the donation before proceeding. This way, donors can ensure they make the most of the contribution for both their personal financial situation and the charity.

Before making your next donation, consider the following three charitable giving strategies.

Qualified charitable distribution from your IRA

At age 72 the IRS requires that a minimum distribution be taken annually from most retirement plans. When taken, those distributions are taxable as ordinary income. To minimize that tax impact, if you are age 70½ or older, consider making the charitable contribution from your IRA as a qualified charitable distribution (QCD).

Although the donor cannot use the distribution value as an itemized charitable deduction, as a QCD, the donation gains a similar benefit: the IRA distribution used for charitable purposes is not taxable in the year of donation. As an added benefit, amounts distributed via QCD also work toward satisfying the required minimum distribution (RMD). Distributions via QCD are beneficial because they allow the donor to make charitable donations using dollars that would have otherwise been distributed (and taxed) from the IRA.

Donation of appreciated investment securities

Another option to consider is to donate appreciated investment securities to the charity in place of cash. Appreciated securities are subject to capital gains taxation in the year of sale. Once liquidated, the tax impact from that sale will reduce the overall value of the investment.

However, by donating the securities to a charity, it will still receive the dollar-for-dollar value of the donation. The donor will also avoid recognizing capital gains taxes on any gains in the security.

Before donating securities, be sure that the charity can accept the positions. Additionally, the donor should ensure the positions have been held for over one year. If you donate positions that have been held for less than a year, the IRS will only permit you to deduct the lesser of the positions' fair market value or their cost basis on your tax filing.

Using a donor-advised fund

Lastly, donors can consider using a donor-advised fund (DAF). Giving to a DAF allows the donor to separate the timing of their donation from the timing of their tax deduction. With a DAF the tax deduction is taken in the year money is contributed to the fund, not the date the money is given to the charity.

Separating the time that the donation is given to the charity (typically in the future) from the time the donation is deducted is helpful as it allows donors to accumulate charitable dollars in a more tactical manner. For example, donating to the DAF in a high-income tax year.

Apart from separating the charitable gift from the deduction, the donor can further maximize their personal planning by using appreciated securities to fund the deductible contribution into the DAF. This obtains the same benefit for the donor as mentioned above.

Additionally, if the donation will not be made for some time, the value donated into the DAF can be invested over time to increase the contribution's value in the future. Most DAF custodians will provide account owners with several investment options to select, ranging from lower-risk investments (e.g., money-market funds) to higher-risk investments (e.g., stock funds).

Key take-away

Regardless of the type of contribution, charitable giving makes an impact on the receiving organization. By doing some personal planning before processing charitable activity, the donor can ensure they maximize the planning benefits for themselves as well.

• Brian Niksa is a senior wealth adviser with Capstone Financial Advisors in Downers Grove.