Our last article covered some basics of charitable giving. Now, let’s dive into a few ways you can give to your organizations of choice and how to form an optimal charitable giving strategy.
It’s important to ensure that your charitable giving strategy incorporates all of the relevant tax considerations so that your tax bill is lowered while the organizations and causes that you support see the greatest benefit.
Your strategy may include giving in the following ways:
Giving cash is the simplest and most common way of supporting charities. By “cash”, we mean physical cash, checks, credit cards, and other direct money transfers. The benefit of giving cash is the simplicity, particularly for smaller gifts. It is important, however, to keep a record of these gifts for tax purposes, as it’s the responsibility of the individual taxpayer to keep track of donations.
Depending on your tax situation, you may not see any tax benefit from outright gifts of cash. Charitable deductions are only available as an itemized deduction, so if you don’t itemize your deductions and only make small outright gifts, it’s unlikely that you’ll see a tax benefit (click here for more information on itemizing deductions). The CARES Act has made an exception to this for 2020 only. This exception allows those who don’t itemize their deductions to still deduct charitable gifts of up to $300.
For those who don’t typically itemize their deductions but do give a fair amount to charities and want to take advantage of the associated tax breaks, donor-advised funds can offer a good solution. Donor-advised funds have taken off in popularity since the standard deduction was doubled at the end of 2017, which meant that fewer people had the need to itemize their deductions. Donor-advised funds enable you to make large contributions that are tax-deductible and that can be used to fund future giving.
Suppose you typically gave $10,000 per year to charities, which, on its own, would not be sufficient to itemize deductions and get the tax benefit. Even if you had a sufficient number of other deductions for the charitable giving to put you over the top, you may be leaving money on the table. If you were to put $50,000 into a donor-advised fund, that entire amount would be deductible in that tax year rather than waiting until the money is actually distributed to the charities that you plan to support. That $50,000 can then be invested for growth (tax-free) over time and used to fund future charitable contributions that you plan to make for years to come.
Whether you’re giving directly or via donor-advised funds, you may be able to reap even more tax benefits from your donations by gifting appreciated assets, which enables you to avoid paying capital gains tax. Suppose you purchased one share of Amazon stock ten years ago for $120. If you sold that single share recently for $3,240, you would have to pay taxes of up to 23.8% on the $3,120 in growth. But if you instead gifted that share to charity, you would avoid paying those taxes, and the charity avoids paying taxes on the donated share as well. Adding that tax break to the itemized deduction that you would also have can create significant tax savings. One thing to keep in mind is that the maximum amount that you can deduct for gifts of appreciated assets is limited to 30% of adjusted gross income, whereas you can deduct up to 60% of income for cash gifts.
Qualified charitable distributions (QCDs)
For those over the age of 70½, QCDs can be a great strategy for giving and have also become increasingly popular since the standard deduction was doubled in 2017. Although withdrawals from IRAs are fully taxable, QCDs allow you to make donations directly from your IRA to a qualified charity without those amounts being counted as taxable income. This means that you can see a tax benefit without needing to itemize your deductions.
QCDs can also be counted toward your required minimum distribution (the amount that you’re required to take from your account each year if you’re 72 or older). QCDs can be a useful tool if you need to take an annual RMD, you don’t necessarily need that income, you don’t itemize your deductions, and you have charitable priorities.
Our next article will look beyond lifetime giving and explore ways to include charitable priorities in your estate plan, either by specific bequests through beneficiary designations, or through charitable trusts and foundations.
If you have questions about your charitable giving strategy, please fill out our contact form and a team member will be in touch soon to schedule a consultation.