Understanding 5 important strategies for gifting.
As year-end approaches, many of us participate in the worthy cause of charitable giving. Charitable giving not only helps those in need, it also plays an important role in tax planning and estate planning. Whether you give a little or a lot, there are strategies for you to consider. In addition, for those who have more than enough to satisfy their own retirement and family goals, charitable giving can be structured in a manner that provides a family legacy. Read below to learn more!
Five key charitable giving strategies:
1. Using cash as a charitable gift to reduce your taxable income:
Did you know that with the CARES Act (as extended by the Coronavirus Stimulus Act), the percentage-of-adjusted gross income (AGI) limit on cash contributions has been increased from 60% to 100% of AGI? Here are a couple important notes to consider:
- 2022 Federal tax proposals could impact this limit. And so, this could be the year to take advantage of the increased limit.
- You must itemize your deductions on your federal income tax return to take advantage of the reduction of AGI.
- Cash donations are, by far, the most common method of charitable giving. The higher gifting limit enables you write-off more of your charitable giving.
- For those with enough resources, it is now possible to fully offset your income and reduce your tax bill to zero. Sounds enticing; however, there are other more complex issues to investigate. If this might be a strategy for you, reach out to your advisor and tax professional for further discussion.
2. Using appreciated securities as a charitable gift to reduce capital gains and estate taxes:
Contributing stocks, bonds, or mutual funds that have appreciated over time has become an increasingly popular charitable giving strategy. Most publicly traded securities may be donated to a public charity. If the security has been held for more than one year when the donation is made, the you can claim the fair market value as an itemized deduction on your federal income tax return (assuming you itemize their deductions). The amount deducted in a single year can be up to 30% of your AGI. Other types of securities, such as restricted or privately traded securities, may also be deductible, but additional requirements and limitations may apply. No capital gains taxes are owed when the securities are donated, not sold.
Moreover, people who receive compensation in the form of their employer’s stock can carry a sizable exposure to that company. Gifting shares of company stock can help satisfy your philanthropic goals as well as the common goal to diversify your portfolio, all while managing the impact on your capital gains tax.
3. Using a bunching strategy from year to year:
The 2017 tax laws simplified tax filing for many people by increasing the standard deduction and capping many itemized deductions. But since that means some filers who used to itemize may no longer need to do so, it became difficult for those filers to get a tax deduction for their charitable contributions.
To make the most of the potential tax deductions, consider “bunching.” That means concentrating deductions in a single year, then skipping one or even several years. This strategy can work well when your total itemized deductions for a single year fall below the standard deduction. Charitable contributions for several years made at once may allow the total of itemized deductions to exceed the standard deduction, making it possible to obtain a tax deduction for at least part of the charitable contributions. The catch is that this strategy requires having the financial capacity to pack more than a year’s worth of your charitable contributions into a single year.
4. Using a donor-advised fund for your charitable giving:
A donor-advised fund, or DAF, is an account where you can deposit assets for donation to charity over time. The donor (you) gets a tax deduction for making contributions to the donor-advised fund. A sponsoring organization manages the account, and the donor recommends how to invest the assets and where to donate them. Technically, once assets are deposited into a donor-advised fund, the sponsoring organization has legal control over them. But as long as you choose a charity that’s recognized by the IRS as a U.S. charitable organization, the sponsoring organization will usually use your charities of choice.
In addition to providing financial support to charities, donor-advised funds can provide more immediate income tax deductions for donors, as well as potentially reduce capital gains taxes and estate taxes.
Possible benefits of a donor-advised fund include:
- You can claim a tax deduction in the year you contribute assets to the donor-advised fund rather than in the year the contribution goes to the charity. And so, if you deposit assets that will be given to charities over multiple years, you take the tax deduction on the total amount in the year you deposit the assets.
- You won’t pay capital gains taxes on assets you put in a donor-advised fund, and if you donate assets that are worth more than what you paid for them, you typically can deduct the current market value of the asset rather than what you originally paid for the asset.
- If you expect to pay federal estate taxes (in 2021, these taxes apply only to those with estates of more than $11.7 million or $23.4M per couple), putting money in a donor-advised fund can reduce the size of your taxable estate. How? Assets you put into a donor-advised fund aren’t subject to estate taxes, so they don’t count toward your total estate value.
- DAFs also provide a means to establish a legacy of giving. When developing your estate plan, you can make a bequest in your will so any remaining assets in your donor-advised fund are donated to your charities of choice after you die. There’s also the option to pass the assets to heirs so they can take the philanthropy mantle and give grants to charities they want to support.
- In addition, once donated to the DAF, assets can be invested and earn returns without being taxed.
5. Using a Qualified Charitable Distribution (QCD) from an IRA
If you are at least age 70½, have an IRA, and plan to donate to charity this year, another consideration may be to make a QCD from your IRA. This action can satisfy charitable goals and allows funds to be withdrawn from an IRA without any tax consequences.
If you are over age 72, a QCD can also be used to satisfy your required minimum distribution (RMD)—up to $100,000 per individual. QCDs may be particularly appealing if you have few other itemized deductions or if you are already close to your charitable deduction limitations. Because the tax-free QCD is never reported as income or as a deduction, it is not counted against the charitable limits and does not require itemization to be effective. And so, if you are subject to an RMD, don’t need the funds, and would face increased income tax liabilities if you took the entire RMD, a QCD can yield both a good tax and philanthropic result.
Reach out to your wealth advisor if you would like to discuss these strategies in more detail and understand how they may apply to your particular circumstances. Live to Give!
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