Make your charitable gifting count

June 25, 2015
Since 2013, high-income doctors have been subject to reduced itemized deductions resulting from the American Taxpayer Relief Act.

John K. McGill, JD, MBA, CPA

K. Warren Poe Jr., CFP

Since 2013, high-income doctors have been subject to reduced itemized deductions resulting from the American Taxpayer Relief Act. Limited deductions and higher tax rates make using advanced charitable gifting strategies more valuable, so doctors need to make sure their charitable donations are being made as tax efficiently as possible.

The most common way doctors donate to charities is by writing a check. While this may accomplish a doctor's desired goal of assisting the charity monetarily, the doctor is giving "after-tax" funds and missing a great opportunity to give in a more tax-efficient manner.

Rather, doctors should consider gifting their most highly appreciated stocks to their favorite charities. Not only does this provide the charity with the same monetary benefit and the doctor with the same tax deduction, it also eliminates taxes on the donated stock's appreciated value. With the maximum long-term capital gains tax rate rising to 23.8%, this strategy is now even more lucrative for high-income doctors.

While this strategy may sound straightforward, it can be difficult to implement. Obtaining the necessary information to physically transfer a stock from your brokerage account to the charity is typically time consuming and involves several phone calls, paperwork, transfer confirmation, and receipt from the brokerage firm and charity, etc. Most doctors do not have the time or patience to deal with these issues. Fortunately, there's an easy solution-establish a donor-advised fund.

A donor-advised fund simplifies the process of donating securities to a charity by serving as an intermediary between donor and charity. Instead of donating the stock directly to the charity, a doctor donates the stock to a donor-advised fund, which sells it. Thereafter, the doctor can recommend a grant to the charity. The charity then receives a check for the amount of the recommended grant, which streamlines the entire process. Grants can be recommended to any IRS-approved 501(c)(3) public charity.

Although simplifying the process of donating a stock to charity is the biggest advantage of a donor-advised fund, there are additional benefits. For doctors giving to multiple charities during the year, a donor-advised fund eliminates the need to maintain receipts. Since the doctor takes the tax deduction based on the value of the stock when it is transferred into the donor-advised fund, nothing else is needed for tax purposes when grants are requested.

Donor-advised funds also allow for better charitable planning by doctors. Since the tax deduction is taken when the contribution is made, doctors can accelerate donations in a given year without actually giving the gift to the charity. Savvy doctors may even double or triple their annual charitable contributions by making them all in a year in which they are itemizing, then switching back to taking the standard deduction when itemizing is less advantageous. This allows doctors to receive credit for their gifts while making charitable grants at their normal pace.

Doctors who own a highly appreciated stock sometimes hesitate to use this strategy for fear of eliminating the stock from their portfolio when they feel it is still a good investment. In this situation, doctors would repurchase the stock with cash that would have been used to make the donation to the charity. There is no rule prohibiting the repurchasing of a stock after it has been donated. This effectively keeps the same amount of stock in doctors' accounts, while eliminating the low cost basis in favor of a higher one. This should eliminate any reservations a doctor may have regarding use of donor-advised funds for charitable gifting.

John McGill, JD, MBA, CPA, provides tax and business planning for the dental profession and publishes the McGill Advisory newsletter through John K. McGill & Company, Inc., a member of the McGill & Hill Group, LLC.

K. Warren Poe Jr, cfp, provides investment advice through McGill Advisors, Inc. (RIA). Both men are members of the McGill & Hill Group, LLC, your one-stop resource for tax and business planning, practice transition, legal, retirement plan administration, CPA, and investment advisory services. Visit www.mcgillhillgroup.com.

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