For those who are charitably inclined, pause before you make cash gifts. You could be missing out on extra tax benefits by not following tax savvy gifting strategies. Here, we provide some insights to enhance your charitable intentions and tax benefits with a focus on the timing of your charitable contributions.
If You Are Not Taking Required Minimum Distributions (RMDs)
If you are not taking RMDs and age 70 ½ or older, the following gifting strategies could benefit you.
Appreciated Securities
Gifting appreciated securities to a charitable organization or Donor Advised Fund (DAF) can prove to be an optimal alternative to cash gifts. The associated tax benefits may assist in reducing your current taxable income while also averting future capital gains. There are varying tax rules that determine how much you can deduct and may require advance planning.
Donor Advised Funds (DAFs)
Donor Advised Funds provide you with the capability to receive an immediate tax benefit for contributions made, while retaining flexibility to defer distribution of the assets to charitable organizations over multiple years. Donor Advised Funds can be especially advantageous if the following apply to you:
- You Have Higher Than Normal Income or Capital Gains: Making a large gift in a high income tax year can help to offset taxable income subject to higher than normal income tax brackets.
- You Project Your Income to Decline: Accelerating gifting before your income declines (i.e., before you retire) can allow you to capture deductions at higher tax brackets.
- You Claim the Standard Deduction: DAFs also offer a tax strategy that allow you to concentrate or “bunch” several years of charitable gifts during one tax year. This can be an effective approach if you claim, but fall below, the standard deduction which would mean that you forfeit thousands of dollars of deduction benefit. This is frequently the case for married couples. By bunching charitable contributions into one year, you increase your total deduction benefit for the charitable contributions you plan to make over multiple years while retaining the ability to complete those gifts to organizations over the same extended timeframe.
Example: Lisa’s charitable contribution is $10,000 per year but her total itemized deductions fall below the standard deduction. To increase her total itemized deductions in the current tax year, she decides to “bunch” five years of contributions into her Donor Advised Fund (for a total charitable contribution of $50,000). Lisa can distribute the DAF assets over five years, while resuming the standard deduction in the following four years. Once the charitable gift fund is depleted, she can consider a similar strategy.
Donating Goods
If you itemize deductions, you may also include the value of donated goods such as clothing, furniture, art and other items. The IRS sets a modestly low dollar threshold before you are required to submit a qualified appraisal. Make sure to review the IRS requirements to determine if an appraisal is required while you still have possession.
Considerations If You Are Taking RMDs
Qualified Charitable Distributions (QCDs)
If you don’t need all of your Required Minimum Distribution to supplement your income, gifting part of your RMD could be ideal. You can make Qualified Charitable Distributions (QCDs) up to the annual limit each year directly from your retirement account. QCDs provide a dollar-for-dollar reduction against your taxable income. This can increase your tax savings if you are taking the standard deduction or if your gifts exceed IRS permissible percentage limits of your adjusted gross income.
Example: Ted’s RMD is $80,000, but he only needs $50,000 to supplement his retirement income. Instead of recognizing the full $80,000 taxable IRA distribution, Ted decides to make a $30,000 QCD from his RMD. This reduces his taxable income by $30,000, thus lowering his taxes and possibly lowering his Medicare premiums.
Every situation is unique and should be carefully evaluated with guidance from your independent financial advisor and your tax preparer. Other elements should be taken into account including investment positioning, the magnitude of capital gain exposure, the likelihood of selling the investment in the future, and other tax facts, e.g., Social Security tax impacts, Medicare premium effects, and your ability to claim medical expense deductions.
Charitable giving is a lifeline for non-profit organizations. If you would to develop a planned giving strategy that aligns your wealth with your personal and family values relative to tax reform, investment positioning, and more, we invite you to contact us.
