Andrew Tucker, JD, CFP
John K. McGill, JD, MBA, CPA
’Tis the season when charitable organizations hope that doctors looking for end-of-year tax deductions will make their contributions to them. While we all know that charitable contributions garner an itemized tax deduction, structuring charitable gifts properly allows doctors to save beyond the deduction. Here are a few things to consider before we head into the holiday season.
Give your appreciation
Instead of writing a check, doctors should consider gifting their most highly appreciated stocks to their favorite charities. Not only will this provide the charities with the same monetary benefits and the doctor with the same tax deductions, it also eliminates capital gain taxes on the donated stocks’ appreciated values. With the maximum long-term capital gains tax rate at 20% and the net investment income tax at 3.8%, this allows doctors making gifts with $10,000 of appreciation to save $2,380 in income taxes. In some states, the combined federal and state income tax savings could be as much as $3,500.
After making the gift, the doctor either repurchases the same stock with the cash that would have been used to make the donation to the charity, or uses the cash to rebalance his or her portfolio with new investments. This effectively keeps the doctor with the same amount of stock in his or her account, but with an increased basis.
Timing is everything
If you want to really save big, combine the above strategy with the use of a donor-advised fund during years in which you have a big income tax bill, such as the year of a practice sale. Prefunding these contributions allows you to claim the deductions while in a much higher tax bracket, rather than in future low taxable-income retirement years. Additionally, prefunding provides the funds to continue to make gifts to charity in retirement without having to tap into retirement funds. Following the gift, the donor-advised fund will typically sell the stock and reinvest the funds, with all earnings growing tax free. You can then distribute these funds at will to your charity of choice over a period of years.
RMDs, if you please
While these strategies work well for doctors who are actively practicing, retired doctors often don’t see the same tax benefits from charitable contributions. This is because most retirees have little debt, which often results in doctors taking the standard deduction on their returns. When this happens, charitable contributions of after-tax cash can become a lost deduction, as the total itemized deductions, including the gifted amounts, do not exceed the standard deduction.
Enter the required minimum distribution (RMD), the minimum amount required to be taken from the retirement plan. Doctors often do not need this money for living expenses since many are living from practice sale proceeds or after-tax investments. A largely underutilized option for doctors is to make charitable contributions directly from their RMDs. While there is no deduction on gifted RMDs, a doctor can still take the standard deduction at tax time while eliminating the requirement to take the income from the account. This allows a doctor to remove the charitable contributions from his or her income while still taking the standard deduction, which results in enhanced tax savings. This also allows the doctor to eliminate adjusted gross income (AGI) thresholds on gifts of appreciated stocks, which is otherwise limited to 30% of AGI.
Andrew Tucker, JD, CFP, and John K. McGill, JD, MBA, CPA, provide tax and business planning for the dental profession and publish the McGill Advisory newsletter through John K. McGill & Company, Inc., a member of the McGill & Hill Group LLC. It is dentists’ one-stop resource for tax and business planning, practice transitions, legal, retirement plan administration, CPA, and investment advisory services. Visit mcgillhillgroup.com.