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4 Tips to Help Maximize Your Charitable Impact

Couple plans how to direct their assets to charitable causes in a tax-efficient manner

How to Efficiently Direct Assets to Charitable Causes

As year-end nears, many people start thinking of ways to maximize their charitable donations and lower their taxable income for the year. Following are several strategies to help minimize your taxes while maximizing your impact.

#1 – “Bunch” your donations.

If you don’t itemize your deductions on your income tax return (i.e., you take the standard deduction), you won’t be eligible to deduct charitable donations from your taxable income. Fortunately, you can still reap the tax benefits of donating to charity by “bunching” multiple years of donations into a single, large contribution.

For example, if you typically donate $4,000 per year to charities, it may make sense to instead “bunch up” those contributions and donate $20,000 every five years. The key is to make sure you donate an amount high enough that results in itemized deductions on your tax return that exceed the standard deduction.

#2 – Think beyond cash.

Instead of donating cash to a charitable organization, it may be more impactful and tax-efficient to make an in-kind donation of appreciated securities, such as stocks, bonds or mutual funds.

For example, let’s say you decide to donate $2,000 in appreciated stock to your favorite charity. Your cost basis for the stock is $400. If you sell the stock for $2,000 and donate the proceeds, you’ll owe capital gains taxes on the $1,600 gain. At a 15% capital gains tax rate, that means you’ll need to pay $240 in taxes following the sale, and $1,760 will be left to donate to the charity. Assuming you itemize your taxes, you would be eligible to deduct $1,760 in charitable donations from the transaction.

On the other hand, if you were to make an in-kind transfer of the appreciated stock directly to the organization, you would avoid triggering a taxable event, and the charity would receive the entire $2,000 value of the stock. Because charitable organizations are tax-exempt, the charity could then sell the stock without paying taxes on the transaction. As a result, you could claim a charitable deduction of $2,000 on your itemized tax return, and the charity would receive the full $2,000 market value of the stock. Clearly, that’s a win-win for both you and the cause you wish to support!

#3 – Contribute to a donor-advised fund (DAF).

Whether you wish to donate cash or appreciated assets, a DAF can be an effective way to lower your taxes and optimize your charitable impact. A DAF is a 501(c)(3) charitable fund that holds irrevocable charitable gifts. As the donor, you retain control over the timing of charitable distributions as well as the qualified charitable organizations to which donations are made.

One of the main benefits of establishing a DAF is that you can make a single large contribution of cash, securities or other assets (to include complex assets, such as ownership in a business or real estate) during a year in which your income is higher than normal, then distribute assets to charities over several years. By doing so, you can take a charitable deduction from your itemized tax return in the year you made the donation while supporting charities over time. This can be an especially effective way to lower your taxable income during years in which you experience a large taxable event, such as a bonus, equity vesting, or the sale of a business or other asset.

Soon-to-be retirees often use DAFs to plan for charitable giving throughout retirement. By front-loading your DAF during your high income-earning years, you can lower your taxable income in the current year while setting aside funds for giving in retirement when your income (and tax rate) may be lower.

Another benefit is that the assets within the DAF can be invested and grow tax-exempt within the account. This provides you with an opportunity to establish a charitable legacy for future generations of family members, as children and grandchildren can have a say in how assets are donated to various organizations.

#4 – Consider a qualified charitable distribution (QCD).

If you’re over the age of 70 1/2, you may want to consider donating a portion of your IRA required minimum distribution (RMD) to a charity.

Many retirees find that having their IRA RMD paid directly to themselves increases their taxable income enough that they fall into a higher tax bracket. As a result, they may face higher Medicare premiums and need to pay more in taxes on their Social Security benefits. All of this can be avoided with a QCD.

The IRS allows individuals age 70 ½ or older to make a direct donation of up to $100,000 from their tax-deferred retirement accounts to a charity, with no negative tax impact.

There are a few requirements that must be met in order for your charitable donation to count as a QCD:

  • The charity that receives the donation must be a 501(c)(3) organization and cannot be a private foundation, donor-advised fund or supporting organization.
  • In order for the QCD to be applied toward the current year’s RMD, the funds must come from the tax-deferred retirement account before the RMD deadline (typically December 31).
  • The distribution must be made payable directly to the organization from the retirement account’s trustee.
  • Upon completing the QCD, it’s important to obtain confirmation from the receiving organization of your donation and retain it with your important tax records. Let your CPA know about the QCD so that they report it correctly on your tax return.

As with most financial planning strategies, the charitable giving strategy that’s right for you depends on multiple factors, including your age, current financial situation, taxable income, goals for the future and more. The best way to maximize your charitable impact while lowering your tax liability is by working with a qualified wealth manager. But don’t worry, Creative Planning is here for you. If you’d like help with your charitable giving and tax planning strategies, schedule a call with a member of our team. We look forward to working with you.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.


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