We have highlighted a few strategies below.
Donor-advised-fund (DAF) and “Bunching.” Increase Contributions and Deductions.
A Donor-Advised Fund (DAF) is funded by you and still enables your annual giving to your favorite charities. So why use one? Because your contributions to the DAF are deductible when you fund the DAF, so you can ‘bunch’ multiple years of intended philanthropy in one tax year for greater tax savings, but still distribute the gifts to charity consistently each year. Same donations, just less taxes. Much like a charitable “checking account,” you can pre-fund the DAF, receiving deduction benefits that year, and then choose the timing for distributing that money in future years. You can also invest those funds in stocks or bonds while you are deciding where to distribute funds. A DAF account may help separate the tax considerations of your philanthropy from the decisions about where to give by giving you the time to decide.
Unless you have significant itemized deductions each year, you are likely taking the standard deduction –and unlikely getting full tax benefits from your giving. By “bunching” an amount every 3-5 years, you can push deductions over the standard deduction level, then take the standard deduction in the years in between those “bunched” gifts. This can be particularly effective in a year when your income spikes or is variable year-to-year.
Pro Tip: The “Bunching” strategy is ideal for anyone capped at $10k state & local tax deduction vs. standard deduction. If the standard deduction is $27,700 (2023) for married-filing-jointly then the first $17,700 of your charitable giving provides no tax savings each year. If you give $15k year to charity annually, you will get zero tax deduction from giving. However, if you bunch 3 years of giving into 2023, then you will get to deduct the amount over $27,700 in 2023, and still disburse the philanthropy to the end-charities over 2023 – 2025. There is no change to the amount or the charity; you are just taking a $17,300 deduction that is otherwise unused.
Donate Appreciated Securities. Deduct full market value and avoid realizing capital gains.
Whether you are funding a DAF or giving directly to a qualified charitable organization, consider the use of appreciated assets. Gifting stock instead of cash can supply a two-fold bonus: receiving the deduction benefit and bypassing capital gains tax on that asset.
To incorporate the donation of assets to fund a DAF requires early planning. It is important to collaborate with a financial advisor to decide if an asset is eligible and start the proper steps ahead of time. As there are some limitations, it is also important to consult a tax professional to help with these considerations. Contributions must be received by December 31 to qualify for charitable deductions in that tax year.
Pro Tip: You can also donate cash from the sale of depreciated securities. This is a good strategy to keep in mind if you have securities in your portfolio that have lost value. You can sell those securities at a loss and use tax-loss harvesting to offset capital gains and up to $3,000 of ordinary income. Then you can claim a charitable deduction if you donate cash from the sale proceeds.
Qualified Charitable Distributions: RMDs can be satisfied with direct gifts to charities.
You may consider Qualified Charitable Distributions (QCDs) if you are 73 or older. Charitable gifting from your IRA is tax-free and will count towards your RMD (Required Minimum Distribution). For example, if your RMD for the year is $50,000 and you give $10,000 by way of the QCD, your taxable distribution on your tax return is only $40,000. This is the equivalent of getting a $10,000 deduction from charitable giving for taxes – in addition to taking your standard or itemized deductions. This also lowers taxable earnings for state returns.
As the QCD can help mitigate your Adjusted Gross Income (AGI), it can also aid when navigating the Income Related Monthly Adjustment Amount (IRMAA) threshold that affects the Medicare premiums deducted from your Social Security monthly check. If you are slightly over the threshold of having a higher assessment, using a QCD strategy could lower your AGI to avoid this.
Pro Tip: With tax-deferred retirement accounts, such as traditional IRAs, you can use charitable deductions to help offset the tax liability on the amount converted to a Roth IRA. Roth IRA bonuses are their tax-free growth and withdrawals, no annual RMDs, and cut the tax liability for your beneficiaries.
As there are many options to better any giving strategy, it is important to speak with a financial advisor and plan an approach to charitable giving best suited to your financial situation. These strategies are more complex, but the tax savings can be great. Please talk with your investment advisor, as well as legal and tax professionals to learn what may work best for you and your family.