Smart generosity: Tax-savvy year-end giving
December 02, 2013
The end of the year is a great time to think about making a charitable gift to a cause you care about. While it can sometimes be hard to be as generous as you'd like, knowing the potential tax savings may make things easier. Here are some smart ways to give while saving tax dollars as the year draws to a close.
Giving to charitable organizations
Make a cash gift. Monetary donations (whether by check or credit card) directly to charities are the simplest and most common form of charitable giving, and cash gifts to nonprofit organizations are often tax-deductible. The amount of tax savings depends on your tax bracket. For example, if you're in the 35% marginal tax bracket, a $100 gift may reduce your taxes by $35 ($100 × 35%).
How Vanguard Charitable can help
A donor-advised fund is a tax-effective way to consolidate, accrue, and grant assets to charity.
The personal philanthropic accounts offered by Vanguard Charitable allow you to support your favorite charities without having to perform day-to-day investment management, grantmaking, or oversight activities.
Give appreciated securities. Another tax-savvy way to make charitable gifts is to donate appreciated securities to a qualifying charity. Examples include stocks, bonds, or mutual fund shares that have appreciated in value and that you've owned for more than one year. When you make a qualifying donation of appreciated securities, you may take a full tax deduction for the market value of the investment and avoid paying taxes on the appreciated value.
For example, if you paid $300 several years ago for stock that's now worth $1,000 and you're in the 35% tax bracket, your direct tax savings would be $350 ($1,000 × 35%). You'd also avoid the capital gains tax that you'd otherwise have paid on the investment, for an additional savings of $105 (15% capital gains tax rate × the $700 gain). (Learn more about these types of charitable donations in IRS Publication 526.)
Note: The American Taxpayer Relief Act of 2012 (ATRA) raised the top marginal income tax rate to 39.6% and the top capital gains tax rate to 20%. The examples here are for illustrative purposes only; consult a professional tax advisor for guidance on your personal situation. ATRA also reinstated a provision known as the Pease limitation on itemized deductions that may affect your charitable deduction. For more information, see Charitable giving: The silver lining in a tax increase or the Vanguard research paper Charitable giving in 2013.
Ways to give
There's more than one way to give to your preferred charitable organization: directly, through a private family foundation, or through a donor-advised fund such as Vanguard Charitable.
One benefit of a donor-advised fund is that you can make an irrevocable contribution and immediately take a full tax deduction for the amount of your gift—even if you haven't yet named a specific charity to receive the money. Simply recommend an investment allocation for your contribution and, over time, request grants to the charities of your choice.
Giving to loved ones
Help fund a child's education. If you'd like to help fund a child's college education, contributing to a 529 college savings account can be a smart option. You can give as much as $14,000 per beneficiary in one year ($28,000 if married filing jointly) without having to file a gift tax return. Moreover, you can "frontload" five years' worth of gifts, and give up to $70,000 per beneficiary in a single year ($140,000 if married filing jointly).
Charitable giving and your estate plan
Philanthropy can play an important role in your estate planning strategy. Vanguard suggests carefully examining your entire estate plan and objectives, including your financial needs, when considering giving to charity.
Make substantial gifts. You may make significant gifts that are exempt from federal transfer tax. Current federal tax laws allow the giver to exempt up to $5.25 million (indexed for inflation) from gift taxes. By making a gift during your lifetime, you may reduce your heirs' future estate tax exposure not only by the amount of the gift but also on the future appreciation of that gift. You can also give up to $14,000 a year per recipient without your gifts counting against the $5.25 million lifetime gift tax exemption.
How Vanguard can help
- To donate Vanguard fund shares held in a nonretirement account to a qualified charity, use our Giving Fund Shares to Organizations Form.
- To give individuals a gift of fund shares from a nonretirement account, use our Giving Fund Shares to Individuals Form.
- To give specific securities in a Vanguard Brokerage Services® account, use the Letter of Instruction for Gifts of Securities form, or to move the securities to another Vanguard Brokerage account, the Changing Ownership of Brokerage Assets.
- To donate from your IRA, use the IRA Distribution Kit.
- To establish a donor-advised fund account with Vanguard Charitable, visit the Vanguard Charitable website.
- The information provided here is intended to be general and educational in nature and shouldn't be construed as a substitute for legal or tax advice. Please consult an independent legal and/or tax advisor for specific advice about your individual situation.
- Vanguard Charitable was founded by Vanguard as an independent, nonprofit organization. Although Vanguard provides certain investment management and administrative services to Vanguard Charitable through a service agreement, Vanguard Charitable is not a program or an activity of Vanguard. Only employees of Vanguard Charitable may send literature or solicit contributions. A majority of the Vanguard Charitable Endowment Program trustees are independent of Vanguard.
- For more information about any 529 college savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you aren't a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Vanguard Marketing Corporation serves as distributor and underwriter for some 529 plans.
- All investments are subject to risk, including the possible loss of principal.
- Vanguard Brokerage Services is a division of Vanguard Marketing Corporation, member FINRA.