Are you making the most impact?
In fact, before we dig into ways to improve the tax efficiency of your giving, it’s also worth asking yourself whether your charitable giving habits have a real impact on the issues you care about. It’s easy to get caught up in responding to fund-raising letters, calls, or drives by making small donations. While this
may make you feel good, with a little more planning, it is possible your gift can have a greater effect. You may find it more satisfying to determine an annual budget for charitable giving which would allow you to be more strategic in your giving. You might decide to give to fewer organizations, but with larger gifts to
ensure your contribution is having the maximum impact. At that point, it’s critical to think about how to do so tax-efficiently.
Giving appreciated securities you’ve held for more than one year
If you have an investment account, and you own assets such as shares of stock or mutual funds that have significantly appreciated in value, donating some portion of these holdings is a smart move. When you donate appreciated stock to charity there are a couple of benefits. First, you may take a charitable deduction for the full fair-market value of the gift if you are itemizing your deductions on your tax return; second, because the gift is made to a qualified charity, you will not be subject to income tax on the capital gains when the stock is sold. This is because qualified charitable organizations are exempt from taxation under current IRS regulations.
This approach to charitable giving offers a win-win for many as it creates an easy to way to support an organization you care about with assets that could create a significant income tax liability if they were sold in your portfolio rather than used to make a gift.
Most charities have the ability to receive stock or other financial assets, and either provide information about how to do so on their website or list a number to call to speak with someone about your intended donation. If you are in any doubt about how to do this in the right way, we can help make it happen.
Consider a Donor Advised Fund
Going a step further, if you want to support multiple organizations, there’s almost no better way to maximize your giving power while minimizing your tax burden than using a Donor Advised Fund (DAF). A DAF is an account in your name or a meaningful title of your choosing, with the sole purpose of supporting charitable organizations you care about. This type of account is administered by a sponsoring charitable organization such as Schwab Charitable, Fidelity Charitable, or Vanguard Charitable which facilitates your giving program. A DAF is best funded with appreciated securities, real estate, or other fixed assets you’ve held for more than a year. Once you gift the securities to your fund, the sponsoring charitable organization will sell them and you will not be responsible for the capital gains. You will receive a charitable deduction for the full value of your gift if you are itemizing on your tax return. It’s also important to note that while you will receive the full charitable deduction in the year in which you made the gift to your DAF, you are not required to donate the full value of your DAF in that year; you can spread your giving over multiple years as you wish. Schwab Charitable – or whichever sponsoring organization you choose – will handle the administrative work and provide you a year-end summary of your contributions to and gifts from your fund, making it easy to track your philanthropy with time.
We often recommend funding your DAF with 3-5 years of anticipated giving to maximize your charitable deduction in a year when you might have extraordinary earned or capital gains income. Called “bunching,” this strategy allows you to itemize in a year when you might not otherwise, or to receive a greater income tax deduction in a year when your income is high.
Finally, having a DAF is a great way to introduce your family to philanthropy. It’s easy to explain as a protected pot of money, like a piggy bank, set aside exclusively for giving to charity. Sit down with your children or grandchildren and show them what you’re doing, even ask them which causes they’d like to support. This approach can be tremendously rewarding, whether adopted at a younger age so it becomes a family tradition or later as a part of your legacy planning. For more on our views on DAFs, please see our piece on our site Dig Deeper.
Your IRA is a powerful source for charitable giving
Most professionals have retirement accounts. Once you turn 70-1/2 you can make charitable donations from your IRA using the strategy called the Qualified Charitable Deduction, or QCD. For many, the QCD is a great way to manage income tax related to IRA distributions while supporting not-for-profits, even if you have not yet reached the age at which your Minimum Required Distributions (RDM) must begin.
The amount you direct to charity using a QCD is not considered income for tax purposes, and thus your Adjusted Gross Income (AGI) is reduced by the amount of your QCD.
For example, let’s say you are 76 and your RMD is $50,000 for this year. If you decide to gift $10,000 of this amount to charity, you will only pay income tax on the remaining $40,000.
Managing income in this way might also result in other tax benefits – such as keeping you below the next tax threshold for the income-related Medicare Part B premium adjustments or prevent you from otherwise breaching the next higher marginal income tax bracket. And while there is a limit on how much anyone can donate to charity using the QCD in a given year, that limit is relatively high at $100,000 per taxpayer for 2023, and it is indexed to rise with inflation in 2024 and beyond. For more on the marvels of the QCD, please see our piece on Dig Deeper.
Death vs. Taxes
From an estate tax perspective, there’s the tax you live with, and the tax you die with. For many of us, the danger of inter-generational giving that’s not tax-efficient is a real issue. For example, it may be inefficient to leave your IRA money to the next generation as your beneficiaries will inherit your income tax liability. As a result, many families are not only using their IRAs for charitable giving during life, but they are naming charities as beneficiaries of these accounts at their death and leaving more tax-efficient assets to members of their families. Legacy planning is very important, and it’s never too early to think about this. We can help you decide how best to benefit both the charities and the people you care about after you’re gone.
Tax-smart, tax-aware giving
Regardless of your stage in life, there are a variety of sophisticated ways you can give. There’s something gratifying about being a sustaining member of an organization whose work you admire by donating in a meaningful way. Staying tax-aware and tax-smart in your giving will make the impact you have all the greater.
We look forward to addressing any questions you have regarding gifts to charities as well as any other tax or financial questions.
Your Bridgewater Team