MAGI and Donating Stocks

[Loren Ver]

Hello Knowledgeable People!
I am looking at donating some stock (mutual fund) directly to a qualifying organization, but its effect on my MAGI is confusing and so is how much I can donate (maximum percent of my AGI??).  I have ACA coverage so my income matters, thus my desire to not realize the gains from this investment (it is about 20% cost basis 80% capital gains).   

Can someone explain to me what effect (if any) donating stock has on MAGI, what limitations there are (percent of AGI?), and anything else I am obviously missing?  The goal is to keep MAGI income low while still donating money.  If this is just going to cause different issues, then I'll need a new plan*.  My expected MAGI for 2023 is $32,000, my expected donation is $65,000.

A bunch of thank yous
Loren

*No I don't want to make a donor advised fund at this time. 

[secondcor521]

You may donate as much as you want to.

A donation of appreciated stock can be taken as an itemized deduction Schedule A line 12.

You can deduct the value of the stock on the date of donation if you held the shares more than one year.

The itemized deduction for such donation is limited to 20% of the value of the stock.  Any excess can be carried forward for up to 5 years; see Schedule A line 13.  Beyond 5 years it may be lost; I'm not sure.

There will be no effect on your MAGI if you donate stock.  To the extent that the donation makes your itemized deductions higher than your standard deduction, a donation will generally reduce your taxable income and your tax liability.

[blueberrybushes]

Loren Ver,

As mentioned by the other post, your donation will not increase your MAGI and, if you already file Schedule A, it will reduce your both your AGI and MAGI, so should your ACA calculations.

The donation limit will be based on your AGI (in case this is different that your MAGI).  Depending on the organization, your limit will be either 20% or 30%.  Stock is considered a non-cash/check donation.  If you sold the sold (creating a capital gains event), your donation limit would increase to 60% of AGI, but you may also have capital gains to report.

If your AGI and MAGI are the same, your limit will be 30% of $32,000 - so $9600.  That means you will have to carry-over $55,400.  And, as mentioned, the carry-over is for only 5 years, so you will not get the full benefit of the deduction unless your AGI increases in future years.  All things staying the same, you will miss out on deducting $17,000 of the $65000 donation.

Given the timing of your question, you may want to spread this donation out across multiple years so you do not loss the deduction in future years.

Have you considered a DAF?

Best,

Paul

[seattlecyclone]

The itemized deduction for such donation is limited to 20% of the value of the stock.  Any excess can be carried forward for up to 5 years; see Schedule A line 13.  Beyond 5 years it may be lost; I'm not sure.

No, you can deduct 100% of the value of the stock, up to 20/30% of your AGI depending on what kind of charity it is. I think most charities tend to fall under the 30% category. The excess does roll over to be an itemized deduction in future years, with a five-year expiration on the carryover.

[Loren Ver]

Thank you for the replies!

Our MAGI and AGI are essentially the same.  We live off capital gains and some dividends so our federal tax rate is as close to 0 as we can get it most years.  We pay some money to the state.

So given that, this is what I am understanding:
1. Donating stock directly will have no impact on our MAGI, so our ACA coverage will not be impacted.  This is by far our biggest concern.  If our income is up, we have to pay back subsidies and the next year we get can get a challenge about our low income claim. 

2. If we do end up owing money to the federal government due to higher than expected income, charitable contribution could count against that if we itemize our tax return.  This probably wont be applicable if our income is as expected.   

So, in essence, charitable contributions do not affect AGI/MAGI, but they do affect how much you have to pay the government, if it's over your standard deduction.

We did another large donation this year, but it was from cashed out stock sold at a loss, so I took the loss to balance out some gains.  But that charitable contribution will also be on the taxes this year.  But it also wont matter, as our income is so low by design.

DH and I talked about a DAF, DH is okay with me donating funds from our growth, but he doesn't like the idea of moving our capital to where we can't access it.  Since he's cool with me donate well above our annual income without complaint as long as I don't mess up our financial plans, I'm not going to push it.  In fact, I'm gonna relish in what I'm able to do :D.

[secondcor521]

The itemized deduction for such donation is limited to 20% of the value of the stock.  Any excess can be carried forward for up to 5 years; see Schedule A line 13.  Beyond 5 years it may be lost; I'm not sure.

No, you can deduct 100% of the value of the stock, up to 20/30% of your AGI depending on what kind of charity it is. I think most charities tend to fall under the 30% category. The excess does roll over to be an itemized deduction in future years, with a five-year expiration on the carryover.

Right, that's what I meant, but you said it better (and corrected me on the 30% thing; I didn't know that part).  Thank you!

[blueberrybushes]

Loren,

I totally get the ACA aspect.  For a few years I lived in fear of exceeding the limits by event $1.  It is a cliff, isn't it?

If I understand your situation correctly, if you file Schedule A because it is greater than the standard deduction, this donation will dramatically reduce your AGI and MAGI and, therefore, your taxable income.  You might end up with more deductions than income and "waste" a donation instead of spreading it out over multiple years.

As for the DAF, I created one 3 years ago and I like it alot.  The DAF is the same as a charitable organization.  The stock you donate does not incur any capital gains.  You still control how those funds are invested and which organization they go to.  The amount you fund the DAF with is 100% deductible - you just have to adhere to the 30% of AGI maximum each year along with the 5 year carryover provision.  My accounts are with Fidelity and they do a very nice job with all of it.

By donating $65,000 in stock directly to the organization, you lose total control over those funds.  If you fund a DAF with that same $65,000, your tax situation is exactly the same and you retain control over when/where those funds are distributed.

Since you plan to donate well above your income, you won't be able to deduct all of the donations for very long.  Same situation my DW and I are in and I just have to accept the fact that I can't squeeze more tax benefits out of what we are doing.

I still think you should consider splitting your donation across 2 years to improve the deduction capability.  However, you may want to parse it a bit by donating cash/check in addition to non-cash (i.e. stocks) because this option may increase your philanthropic activity and deductibility.

What you are doing is wonderful and the organizations appreciate it.

Paul




Charitable donation DO affect your AGI/MAGI if you file a Schedule A instead of taking the standard deduction.  This assume the Schedule A exceed your standard deduction.  This is why some people use DAFs.  It gets complicated and I don't try to parse it that much.

[secondcor521]

I totally get the ACA aspect.  For a few years I lived in fear of exceeding the limits by event $1.  It is a cliff, isn't it?

It's not a cliff at the moment, at least not at 400% FPL.  There are CSR limits that sort of are cliffs at 150%, 200%, and 250% FPL.  There are also payback cliffs.

The famous ACA cliff, though, is the 400% FPL one, which is suspended through 1/1/2026.

If I understand your situation correctly, if you file Schedule A because it is greater than the standard deduction, this donation will dramatically reduce your AGI and MAGI

This is not accurate.    Itemized deductions (and the standard deduction) come after AGI, not before.  AGI is line 11, standard/itemized deduction are on line 12.

[Loren Ver]

We are very interested in the cost sharing reduction, another reason why we keep our MAGI low, it really makes a difference for us.  I know we don't have to "pay it back" if we fall outside of that bracket, but we try to be accurate.

I don't want our income to be too low (medicaid territory) or too high.  But donations don't lower (M)AGI, or rich people would donate even more money :D.

All $65000 is going to one thing.  The only reason I would split it up is if I have to split it between Dec and Jan if I can't donate stock directly and need to liquidate funds and eat the gains, and spread them over two tax years.  I guess I could go 65K to DAF --> 65K to Charity from DAF, then let the DAF sit empty until I need it again.

[blueberrybushes]

Secondcor & Loren:

My bad - I should have written that the donation, if filing Schedule A, reduces TAXABLE INCOME - not AGI/MAGI. 

Good luck with the DAF or direct donation.  Although I have a DAF, it does bring more paperwork and forms to file.  :(

The other reason for keeping your MAGI low, besides ACA, is eligibility for some of the infrastructure rebates for solar panels or heat pumps.  Sometimes they come with tax credits which I cannot use.  Other times, they offer rebates based on your MAGI compared to the area's median income.  But, these are a whole 'nother discussion and headache.

Paul

[Loren Ver]

Ugh!  So newish question.  The investment company doesn't do stocks directly, but what they can do is send a check to me (as I am the address on file) with the charities name on it and then I just pass it to the charity.

Since I am not cashing the check, just handing it off, same question, am I avoiding the capital gains and therefore avoiding changes to my (M)AGI?

I am thinking yes, as this is similar to when an old company mailed a 401k check to us and we just passed it on to new company.  No penalty, since we didn't cash it, just passed it along, but I'm a scaredy cat and don't actually know things.   

Loren

[seattlecyclone]

I would actually assume the opposite: that since they converted your taxable shares to cash in order to write a check that you would be taxed on that sale transaction. Not 100% sure though.

[secondcor521]

I would actually assume the opposite: that since they converted your taxable shares to cash in order to write a check that you would be taxed on that sale transaction. Not 100% sure though.

+1.  Call them and ask if they have to sell the stock / realize the gain to write the check.

[Catbert]

Ugh!  So newish question.  The investment company doesn't do stocks directly, but what they can do is send a check to me (as I am the address on file) with the charities name on it and then I just pass it to the charity.

Since I am not cashing the check, just handing it off, same question, am I avoiding the capital gains and therefore avoiding changes to my (M)AGI?

I am thinking yes, as this is similar to when an old company mailed a 401k check to us and we just passed it on to new company.  No penalty, since we didn't cash it, just passed it along, but I'm a scaredy cat and don't actually know things.   

Loren

Another reason a DAF might be a good idea.  Assuming your mutual fund company has one, it's pretty much an easy click, click to move it into the DAF.  No possibility that it might generate a taxable event.  You can use a DAF as just a pass through if you want (e.g., contribute to DAF one day and send to charity the next day/week/month).  Or if you intend to continue making similar donations to charity each year, you can donate as much as makes sense taxwise in any given year.  That could be more than you plan to donate that year and use in the future.

[blueberrybushes]

Loren,

Sorry for the delayed reply - off line for a few days.

I agree with secondcor521.  Seems to me for the investment company to send a check to you to forward to the charity, they have to sell the stock while it is in your account.  This will create capital gains of about $52,000 right? (80% of the $65,000 is capital gains?).

You will be able to claim a 2023 charitable donation (by itemizing) equal to 60% of your AGI (about $18,000, right?).  The rest you will have to carry-over for up to 5 years.  But, your AGI will increase which could compromise other things you are trying to accomplish.

You want to donate the stock shares directly to the charitable organization (for them to sell) or into a DAF (if you can create one with your investment company.

I know you want to do this 2023, but it might be worth waiting until 2024 to make sure you know what you are getting.

My investments and DAF are with Fidelity.  As Catbert wrote, it is a couple of clicks to transfer the shares out of our after-tax account into the DAF followed by a request to distribute the funds to the charitable organization.  No question of what is happening and they provide all the year-end forms for tax filing.  Easy-peasy!

Good Luck.