4 Options for Tax-Smart Giving
Charitable giving is a big part of plans for our clients. It can be a powerful way to support causes you care about while also reducing your tax burden. Win-Win situation.
By using tax-efficient strategies, you can maximize your impact and take full advantage of deductions, exclusions, and exemptions available under U.S. tax law.
Right now, almost 90% of people who give do not get tax credit for the giving they do. This is because of the standard deduction. If all of your deductions total are less than the standard deduction, then, of course, you are going to take the standard deduction. Because of the increase in the standard deduction included in the TCJA, most people do not get above it.
Here are 4 strategies to consider during your lifetime:
1.Bunching Charitable Contributions:
If your annual donations are below the standard deduction, consider grouping multiple years of donations into one tax year.
Maximizes itemized deductions in high-donation years, then uses the standard deduction in off years.
Example: Instead of donating $10,000 annually for three years, donate $30,000 in one year, itemizing that year and taking the standard deduction the next two years. The key is having the ability and liquidity to do this.
2.Donating Appreciated Assets
You can donate a lot of other sites other than cash. Instead of donating cash, consider gifting:
Stocks, real estate, or other assets that have increased in value. The key is that they have a significant increase in value.
Avoids capital gains tax, which can be as high as 20%.
You receive a deduction for the full fair market value if held for over a year. Even if you still use the standard deduction, this is a good option.
Example: If you donate $50,000 in appreciated stock instead of selling it, you avoid up to $10,000 in capital gains tax while still receiving a charitable deduction.
We call this a double-pay raise; money you would have donated is kept in the bank, and you avoid future capital gains on the sale of the asset.
3.Using a Donor-Advised Fund (DAF)
This strategy is almost a hybrid of the two above.
Allows donors to contribute funds, take an immediate tax deduction, and distribute gifts over time.
Assets in the fund can grow tax-free.
Good for those with fluctuating income or wanting to donate over multiple years. We often use this in years with large Roth Conversions or if someone sells property or a business.
Example: A business owner expecting a high-income year donates $100,000 to a DAF, reducing taxable income immediately while giving to charities over the next decade.
These can be funded with cash or securities. We will often contribute appreciated stock. The client gets the full deduction this year and can distribute the funds over the next 5-10 years. This allows them to spread out the gifts annually instead of bunching but still get credit in one year.
We call this a triple-pay raise; money you would have donated is kept in the bank, you get credit for the deduction, and you avoid future capital gains on the sale of the asset.
4.Qualified Charitable Distributions (QCDs) from an IRA
Available for individuals 70½ or older. We still take this into consideration when planning for younger clients. Keeping a specific $ amount in an IRA to fund future giving is typically a part of the plan.
Transfers funds directly from an IRA to a charity.
Counts toward Required Minimum Distributions (RMDs) but is excluded from taxable income.
Example: A 72-year-old with a $40,000 RMD can donate $10,000 directly to charity via a QCD and pay taxes only on the remaining $30,000.
The current limit on how much you can give via QCD is $108,000
Tax-efficient charitable giving allows you to maximize your impact while reducing taxes. It's always good to review your accounts and plan for potential giving opportunities throughout the year. Hopefully, this will help you understand how to optimize your charitable giving now and in the future.
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About the author: Finn Price, CPFA, CEPA, is a business owner and wealth manager at Railroad Investment Group. He helps successful entrepreneurs & individuals with concentrated stock positions in their 30s, 40s and 50s build, organize, protect and transfer their wealth.
Note: this article is general guidance and education, not advice. Consult your money person or your attorney for financial, tax, and legal advice specific to your situation.
Securities and advisory services offered through LPL Financial, a registered investment Advisor, Member FINRA/SIPC.
