Don’t Stop Giving to Charity During Tough Markets, Just Give Smarter
From inflation and rising interest rates to market swings, recent headlines could have even the most financially savvy investors worried. But the key to weathering market volatility is simple: keep your long-term perspective – these fluctuations are normal and expected. For charitable people, this advice goes even further: keep giving, but be sure to give strategically.
Why keep giving? Because charities desperately need your help.
Nonprofits and the communities they serve continue to experience urgent needs as a result of the pandemic, the humanitarian crisis in Ukraine, and racial and social justice rulings. Many companies and individuals are also appropriately reviewing their giving with a focus on expanding their philanthropic mission, which means their “usual” giving bucket could be split as they step up their giving to different non-profit organizations.
Supporting more charities and responding to needs in a timely manner is not a bad thing. But with all these unexpected needs, on top of market volatility and inflation, I’ve heard from dozens of nonprofit leaders who fear their donors won’t be able to maintain the same levels. essential support.
If all of this sounds overwhelming, you’re not wrong! There are so many needs, but donors like you are already stepping up to make a difference. If you’re ready, you can help meet the needs of established and new charities with smart giving strategies, starting with the assets you use to give.
Give smarter by choosing the right asset
When you’re ready to give gifts, put down your checkbook and, above all, DON’T take out that credit card! Some stocks in your portfolio may still retain significant appreciation after years of market growth, making them a great asset to donate to charity. This is especially true for certain sectors that react differently to market volatility.
By donating long-term appreciated stock to charity, you will generally be eligible for two tax benefits, making it a more strategic approach than donating cash or credit.
First, your donation may qualify for a fair market value tax deduction. Second, you potentially eliminate the capital gains taxes you owe on any appreciation, which again can be significant. Compared to donating cash or selling your securities and contributing the after-tax proceeds, you may be able to automatically increase your donation and tax deduction. In other words, you can give more and save more.
Include donations in your rebalancing strategy and reset your cost base at the same time
When a portfolio is overweight equities, the vulnerability to market corrections increases. Reducing exposure usually means selling appreciated positions, triggering a capital gains tax.
Rather than selling appreciated positions to rebalance your portfolio, consider donating some of it to charity. In accordance with the strategy given above, you may be eligible for these tax benefits here.
Plus, if you already write checks to nonprofits, you can use that money to buy new stock or redeem the same ones and reset your cost base. Not only does this strategy allow you to continue investing in a sought-after asset, but it can also help improve your long-term tax efficiency. If the stock continues to increase in value, thanks to the higher basis, you will owe less on future taxes if/when you decide to sell it. And if the price drops while the market continues its normal swings, you’re more likely to reap a capital loss to offset any capital gains realized.
Don’t be afraid to look beyond your publicly traded investment portfolio
Maybe you’re determined to support your favorite charities when they need you most, but market fluctuations are impacting your wallet more than you expected. Some charities may accept private interests as well as publicly traded stocks – and the appreciation of these non-public assets often makes them favored for charitable donations. Do you hold private C- or S-Corp shares? Are you preparing to sell your business? Maybe you have private interests or restricted stock. And don’t forget your equity compensation as a source of strategic funding. Often these income “assets” are overlooked or seem “untouchable”. However, equity compensation is becoming an increasingly important and strategic source of charitable funding. Analyzing your range of fundraising options can help fuel high-impact giving – consult a trusted advisor for help.
To simplify further, think of a strategic giving vehicle as a donor-advised fund, which is like a charitable investment account that allows you to contribute a variety of assets and invest the balance for potential growth. Charities that sponsor donor-advised funds can often accept donations of these more “complex” assets and turn them into charitable dollars that you can leverage for higher-impact donations. Once you’ve funded your donor-advised fund, you have access to a “ready reserve” of charitable funds, allowing you to support multiple charities from a single tax-advantaged donation, all on a schedule. that suits you. It also means that you can fund your account when it makes financial sense, creating that reserve ready to keep giving, even in an economic downturn.
Seize the Moment for Roth Conversions
If market volatility has caused your retirement account balance to drop, this could be a great opportunity to convert a traditional IRA or 401(k) to a Roth IRA. Roth IRAs allow you to set aside after-tax income, so you’ll have to pay income tax on the balances you convert from a traditional IRA to a Roth IRA. The deduction of a charitable donation made in the same year can offset the increase in taxable income triggered by the conversion.
For example, if your traditional IRA balance has fallen to $500,000 during recent market swings, you might consider converting your Roth IRA now, especially since your tax bill will be lower than if you had it. converted several months ago. If you are in the 37% tax bracket, converting $500,000 into a Roth IRA would normally result in a tax bill of $185,000. But when you combine the conversion with a tax-deductible charitable donation of $100,000 — so long as you’ve already exceeded the standard deduction — you end up owing only $148,000 to the IRS.
While you are considering the conversion, and depending on the size and the potential tax triggered by the conversion, you might consider preloading several years of donations into a donor-advised fund in the year of conversion. This strategy is sometimes called clustering. As the market recovers, not only will you be on the tax-free side of the equation with your newly characterized Roth IRA, but your initial tax-advantaged charitable gift also has the potential to grow, giving you more funds to support your favorite causes in the future.
Beware the storm – sunny days return
With preparation and planning, you can be the hero of your favorite charities by continuing to support them during market volatility, especially when others have to cut back on their annual giving. According to GivingUSA’s annual report on American philanthropy, charitable giving has steadily increased since 1980, declining only a handful of times corresponding to bear markets or recessions. No matter how the market behaves, working with your advisors and taking advantage of these giving strategies can help you weather the storm while making even more of a difference.
The tax information provided is general and educational in nature and should not be construed as legal or tax advice. Fidelity Charitable does not provide legal or tax advice.