Planning Opportunities To Consider Before Year- End Part 4- Giving Strategies
As we enter the season of giving, we would like to highlight a few helpful reminders that you may be interested in taking advantage of before the year is over. These tax-minded strategies consist of using a Donor Advised Fund (DAF) to gift appreciated securities and the IRS rules regarding Qualified Charitable Distributions (QCD) from IRAs. Both of these strategies can provide significant tax benefits when implemented correctly as part of a broader intention to be charitable.
Donor-Advised Fund (DAF): A DAF is a powerful and flexible charitable giving vehicle that allows individuals, families, and organizations to make a lasting impact through philanthropy. As noted in the image below, DAFs are typically best funded with a gift of an appreciated (or other investment), as it allows you to avoid paying capital gains taxes and receive a charitable deduction for the full market value of the security at the time of the gift. This is a particularly powerful tool this year due to the significant increases we have seen in the stock market throughout the year.
The funds within the DAF can then either be distributed to your charity of choice, or invested for tax-free growth, allowing you to maximize the impact of your giving over time. Due to today’s significantly increased standard deduction and the $10,000 cap on deducting state and local property taxes (SALT), many taxpayers no longer itemize deductions and therefore may not receive any tax benefit for making smaller charitable contributions. As such, one of the key advantages of a DAF is the ability to bunch multiple years’ worth of giving into a single tax year in order to have enough to itemize.
For example, if you normally give $5,000 per year in cash by writing checks, you could donate $25,000 of appreciated stock to a DAF and pre-pay five years’ worth of charitable contributions and potentially itemize and receive a tax deduction this year. You can still allocate $5,000 each year to your favorite charities via grants from your DAF. And you can contribute $5,000 in cash back into your portfolio for the next five years to repay yourself for what you donated.
Qualified Charitable Distribution (QCD): A QCD is a non-taxable direct transfer of funds from an IRA to a qualified charity of your choice. Due to the tax-favorability of such distributions, the IRS limits taxpayer eligibility to those who turn 70.5 during the year.
Additionally, for those who have reached required minimum distribution (RMD) age, QCDs offer a meaningful perk, as these non-taxable distributions can help satisfy one’s annual RMD requirement. Furthermore, this charitable tax strategy does not require the taxpayer to itemize deductions, which is particularly valuable given today’s significantly increased standard deduction. Since such distributions are not considered taxable income, they are not added to the “Total Income” figure. For example, a retiree with an IRS-mandated RMD of $5,000 could satisfy that RMD with a $5,000 QCD, completely removing it from taxable income.
Summary Takeaways: This season of giving is a perfect time to reflect on how we can contribute to others, while remaining mindful of our own financial goals. DAFs and QCDs are just a couple of the tax-minded strategies that offer you the opportunity to make a meaningful impact for the causes you care about most. If you have questions about these strategies or would like to review whether they’re appropriate for you, please reach out and let us know!
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