By: Kristiana Daniels, CFP®, EA, BFA™
The days are long, but the years are short. It is a joy to journey with our clients as we make progress toward achieving the dreams and goals important to each family. One common theme we observe in many financial plans is charitable giving. While the specifics of donating generously may vary across households, there is always room for planning so as to maximize charitable gifts.
One of the most common ways people donate to charities is by giving cash or making a check payable directly to the charitable organization. While the majority of donors often choose this method, it may not be the most tax-efficient one when considering your specific situation.
Before the Tax Cuts and Jobs Act increased the standard deduction, significantly more households chose to itemize deductions when filing their tax returns compared to those who itemize now. If you are among the majority who use the standard deduction, you will not be able to list most of the charitable cash gifts you have given throughout the year, thus failing to benefit from your donation around tax time. Tax deductions are rarely the primary motivator for charitable giving, but there are perks offered by the IRS code to incentivize donating, so why not take advantage of this legal benefit?
Here are a couple of gifting strategies that might be useful in your financial plan.
If you are over 70.5, you are allowed to give to a charity from your IRA; thisto give to a charity from your IRA; this is referred to as a qualified charitableis referred to as a qualified charitable distribution (QCD).distribution (QCD).
Simply put, you can make a check payable directly to the charity of your choice from your IRA, and that distribution will not be taxable (up to the $100,000 QCD limit). In addition, if you are of the required minimum distribution (RMD) age, the QCD will count against the RMD figure you are obligated by law to take from your IRA, resulting in a lower taxable income for you. This makes a QCD a great option for retirees who do not need any additional withdrawals from an IRA.
QCDs can be a wise way to support the causes closest to your heart while using the IRS code to your advantage.
If you are younger than 70.5 or itemize your deductions, there are alternative solutions you can implement into your gifting strategy to maximize its impact. Donor-advised funds, for example, are an excellent option for many philanthropically inclined investors. These vehicles enable you to donate appreciated assets held in a taxable brokerage account and then direct the funds to your favorite charities on a time frame of your choice. This allows you to take your larger itemized charitable gift deduction and not pay tax on the capital gain. The contributions remain in your donor-advised fund until you are ready to grant them to your favorite charities. What is more, when a charity receives your gift, it gets the full amount and does not have to pay capital gains tax on the earnings.
When these two gifting strategies are applicable to you, each may have a place and a purpose within your financial plan. We can often use them in tandem to maximize the impact of
your gift.
If charitable giving is important to you, let us know! We would love the opportunity to review your financial plan with you and help you get the most out of your generosity.
