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Thinking Smart Charitable Giving


How to give: Required minimum distribution versus appreciated stock.


Recently, I received a solicitation from a major museum making a plea for recipients to use their individual retirement accounts (IRA’s) as a charitable giving tool. For donors over 70 ½, this seemed to make sense as taking a required minimum distribution (RMD) after this age is mandated each year by the government. The distribution is pre-tax, so tax must be paid on the dispersed sum.

But, by giving the RMD directly to the charity, taxes are avoided. In addition, the distribution then is not part of adjusted gross income (AGI) which could lessen the Medicare premium surcharge or tax levied on social security benefits.

What is unsaid in this pitch from the charity, is that using appreciated stock for the donation is often a better way for many donors to make 501(c)3 contributions. It benefits them more in terms of taxes and assumes the donor has appreciated stock, itemizes deductions and is in a higher tax category.

Take, for example, an individual who is in the 30% tax bracket and has a $10,000.00 RMD for the year. By transferring it directly to the requesting 501(c)3, the donor avoids the $3,000.00 in tax to the government and has a lower AGI. The latter may be unimportant to this individual as her/his AGI is high already and $10,000 more means little difference.

But, if the same donor gives $10,000.00 of appreciated securities held over a year with a cost basis of $5,000.00, the contributor avoids paying 15% X $5,000.00 or $750.00 in long term capital gains tax liability. The giver also receives a tax deduction from the charity for $10,000.00, which is worth $10,000.00 x 30% or $3,000 of tax savings. Thus, the donor’s tax advantage for the securities donation is $3,750.00, $750.00 more than for the RMD tax benefit, $3,000.

Seek Advice

The above caution and alert is meant only to raise a red flag for those who are considering giving to charitable institutions through their RMD. Though this tactic is beneficial, there may be a better way — giving appreciated stock. To make this determination, since the tax code is complicated, seeing one’s accountant is the best way to calculate the pros and cons for anyone individual. By doing so, money could be saved and thereby doesn’t have to be earned-a very smart way of thinking.

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Victor J. Dzau, MD, gives expert advice
Victor J. Dzau, MD, gives expert advice