Tax Planning Tips for the Charitably Inclined

You can do well by doing some good!  Not only can giving to a charity make a positive impact, it can provide an opportunity for some tax benefits too. If you are a high-income earner or a retiree who plans on writing checks to your favorite charities, then you may benefit from these three tax planning tips you can take advantage of in the future.

Donor Advised Funds (DAFs)

• An immediate tax deduction can be taken for the amount donated in the year the contribution is made to the DAF.  Then, you as the donor advisor to the DAF decide which 501(c)(3) organizations (e.g., religious organization, college, hospital/clinic, community center, etc.) receive grants from the fund at any time in the future.  DAFs are a great vehicle to us if you have a big cash flow year and you know you want to make a large deductible contribution, but you aren’t sure to which organizations yet. A DAF allows you to get the deduction today and decide which charities will be ultimate beneficiaries at a later date.

• If a client contributes long-term appreciated securities to their DAF, they can avoid capital gains tax on the appreciated portion and receive an immediate charitable tax deduction for the full market value of the gift.

• Assets donated during the life of the client are no longer part of the client’s estate, and therefore, are not subject to probate or estate taxes. The DAF can also be named as a beneficiary to an IRA, a charitable remainder trust, or other asset.

• Unlike private foundations, there are no start-up costs, no tax on the fund’s investment income, no individual payout requirement, and all record keeping services are included.

Qualified Charitable Distributions (QCDs)

• A QCD allows individuals who are 70.5 years of age or older to donate up to $105,000 per year per individual to one or more charities directly from a Traditional IRA (For 2024, QCD limit increased to $105,000 from $100,000 in 2023). The charity must be a 501(c)(3) organization. Private foundations or donor advised funds are not eligible to receive QCDs.  

• QCDs count toward your required minimum distribution (RMD) amount. (Inherited IRAs also qualify for QCD provided you meet the age requirement.)

• QCDs are non-taxable distributions and not included in your adjusted gross income (AGI).  This is important because regular charitable contributions do not lower AGI.  Lowering AGI can have a number of benefits, including bringing down Medicare Part-B premiums, qualifying for certain deductions, and lowering the taxable portion of Social Security.

• Keeping your taxable income lower can help avoid elevating to the next federal tax bracket or potentially provide opportunities for other tax planning considerations.

Donate appreciated investments.

• Look at your portfolio as an opportunity toward donating long-term appreciated securities (e.g., stocks, mutual funds, bonds). 

• Capital gains are eliminated when you contribute long-term appreciated assets directly to a charity (via the charity’s trustee or custodian) instead of selling the assets and donating the after-tax proceeds.

• The charity can then sell the assets and pay no tax on the appreciated gains because of their tax-exempt status.

In Summary

Act today and consult your fiduciary wealth manager and tax professional to develop a plan to best align with your goals and charitable endeavors. You have an opportunity to make a positive IMPACT on charities both today and tomorrow while also receiving some tax benefits along the way. Please do not hesitate to contact us if you have any questions or if we can help in any way.