Craft Your Charitable Gifting Strategy
Tax season is a great time to consider charitable gifting plans for the coming year. The Family Firm helps many of our clients take advantage of a range of opportunities to maximize their ability to give to worthy causes and to potentially reduce their tax liability. Here are several popular tactics:
Qualified Charitable Distributions (QCDs) are a valuable tool for individuals who are required to take required minimum distributions (RMDs) from their Individual Retirement Accounts (IRAs). The donor works through their IRA custodian to make a direct distribution to a qualified charity. The Family Firm’s custodian, Charles Schwab, makes QCDs easy by allowing clients to write checks from their IRA directly to desired charities.
Up to $100,000 worth of QCDs can be used to satisfy the donor’s annual RMD requirement and are excluded from their taxable income even if the donor does not itemize their deductions. Reducing taxable income not only saves on income tax, but could also reduce the amount of Social Security benefits subject to taxation and Medicare Part B and D premium surcharges depending on the donor’s total income.
Bunching contributions is a potentially useful tactic for those without RMDs and whose itemized deductions do not always reach the standard deduction, which was raised significantly as part of the 2017 Tax Cuts and Jobs Act. By grouping charitable donations in the same calendar year, a donor can potentially raise their itemized deductions above the standard deduction threshold and then take the standard deduction the following year. Here is an example of how this could be useful:
Taxable income: $100,000
Standard Deduction: $24,400
Itemized Deductions (before charitable gifts): $19,000
Annual charitable gifting: $5,000
Under this scenario, the Smiths’ itemized deductions, including the charitable gifting, will remain less than the standard deduction. However, if the Smiths can make two years’ worth of donations in the same calendar year, their itemized deductions would exceed the standard deduction, resulting in a tax savings for that year.
Donor-advised funds are a way to group charitable contributions into a single year and allow donors to grant funds to charities over the course of multiple years. Donors contribute cash or appreciated shares into the fund, and then can take that amount as an itemized deduction on their taxes the same year. The donor can then request distributions from the fund to qualified charities over the course of several years if they choose. Money remaining in the fund can be invested and grow on a tax-free basis.
Gifting appreciated shares of a stock or fund to a charity rather than making a cash contribution not only can create an itemized deduction for the value of the security at the time it is donated but also avoids taxation on any unrealized capital gains associated with the investment. Investments that have appreciated significantly (or “low cost basis” investments) can therefore be good candidates for charitable contributions. Our advisors can help identify the best investments to give and oversee the donation process.
Crafting charitable gifting strategies is one of the services The Family Firm offers our clients. We work together with clients and their tax advisors to maximize donations and the corresponding tax benefits. Please get in touch with us to learn more about how we can support your financial goals.