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Charitable Giving Tax Strategy: Dollar Cost Averaging for Donations

December is gifting season. Many Americans remember to give to charities at year-end due to the holiday euphoria, year-end tax savings opportunities or year-end appeals from their favorite charities.

Gifting at year-end may have adverse consequences if the stock market is tumbling.

Many of you are familiar with dollar-cost averaging. Dollar-cost averaging (DCA) is an investment strategy which involves buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the price. Under this strategy, the investor ends up purchasing more shares when prices are low and fewer shares when prices are high. This way the investor does not have to time the market.

As a reminder only stock held long-term (over a year) is eligible for a charitable contribution deduction at its market value.

Why not consider dollar-cost gifting?

Let’s say you were thinking of gifting 40 shares of Alphabet (ie Google) in December 2018. If this gift was accomplished on Dec 17, 2018, the value would have been $1,016.

If you donated 10 shares each on Jan 5, April 5, July 5 and Oct 5 the average value would have been $1,102.75 with prices ranging from $1,028 to $1,157).

At a $1,102.75 average gift, your deduction would have been 8.5% (or $86.75) more per share.

The caveat is that it’s always possible that your stock could be worth the most in December so there is no absolute right or wrong.

Other reasons to give throughout the year.

(a) If you are over age 70.5 and will be using a qualified charitable distribution from your IRA (the charitable IRA rollover), if you make a charitable rollover in December, this cannot replace any required minimum distribution you already took during the year.

(b) Some charities and brokerage firms get overwhelmed during the last week of the year. In some cases, gifts are not made by your stock broker on time. Your donation is only deductible on the transfer date (regardless if the 3 day settlement date is next year). So if the transfer occurs in January, your deduction is delayed for a year.

To schedule a tax planning meeting, please contact me today.

Richard Pon CPA, CFP