With the year coming to an end, now is an excellent time to revisit your philanthropic plan and review the tools you want to employ in 2024. Whether your household’s charitable routine involves regular or seasonal giving, the IRS has approved several strategies that have the potential to put more of your funds into the community while reducing your taxable income. We have compiled four key strategies to help channel your generosity in the most meaningful ways while keeping your financial goals in mind.
1. Donate appreciated stock in your portfolio instead of cash.
If your accounts have large unrealized gains on securities that you’ve held for a long time, you may want to gift those appreciated securities to the causes that matter most to you. Appreciated securities are shares of publicly traded stock, mutual funds or exchange-traded funds (ETFs) you’ve held for longer than a year and are worth more today than when you purchased them. You only realize the gain on the securities when sold; however, once you choose to sell, you may end up paying a big tax bill on the gains.
If making donations is part of your financial goals, gifting appreciated stock allows you to donate (and deduct) its current market value while also eliminating capital gains taxes you might otherwise owe. This approach can be a tax-efficient way to divest highly appreciated stock or rebalance back to your target allocation while supporting your favorite nonprofit. Gifting appreciated stock through a donor-advised fund (DAF) can further maximize the tax benefit.
2. Gift distributions from an individual retirement account (IRA).
Will you soon need to take required minimum distributions (RMDs) from an IRA that you want to exclude from taxable income? If so, then you may benefit from making a qualified charitable distribution (QCD). This non-taxable IRA distribution allows taxpayers who are age 70½ or older to send funds directly to a qualified charity.
Even though RMDs from your IRA don’t begin until age 73 (or age 75 depending on your birth date), you can make QCDs once you reach age 70½. QCDs exclude the IRA distribution from income entirely. While there is no charitable deduction received for making a QCD, the ability to exclude the income from the start is advantageous for those not in a position to itemize. QCDs can help itemizers and non-itemizers alike by minimizing adjusted gross income (AGI) and modified adjusted gross income (MAGI), to which many other benefits such as credits and additional costs including Medicare premiums are tied.
3. Bunch your charitable gifts into one tax year.
Without counting the charitable gifts you have made or expect to make this year, would you take the standard deduction? If so, then bunching is a strategy you may want to consider. This approach involves loading more than one year of donations into a single year and reducing the number of years that you donate, but giving more when you do. The result is a larger cumulative tax benefit for the same total amount of charitable contributions.
It is only by exceeding your standard deduction amount that charitable contributions provide a current tax benefit. By grouping multiple years of contributions into one year, you help maximize the tax-savings value of your deductions. The goal is to have as little as possible of your charitable contributions wasted when getting your total itemized deductions up to the standard deduction you claim. This doesn’t need to mean a change in your level of giving, just the timing.
4. Write off a large charitable contribution this year while donating the dollars over time.
A DAF or charitable lead trust may make sense for those who intend to make regular charitable donations over time. A DAF is an account in a private fund where you deposit assets from which you make contributions to charitable organizations. While you recommend how to invest assets and where to donate them, a third-party sponsoring organization administers the account and legally controls the funds in it.
DAFs may allow you to take a tax deduction for contributions to the account in the current tax year even if the money isn’t distributed to charities until later. This strategy can be particularly powerful if you know you will be in a much higher tax bracket in a given year. This allows you to bunch contributions when the charitable deduction is most advantageous to fund future giving. Another technique to consider may be a reversionary grantor charitable lead annuity trust (CLAT), which reverts to the donor at the end of the charitable term. Annual payments are made to charity, often a DAF. Grantor CLATs are primarily used to target income tax savings.
Explore your charitable options with an advisor.
While it’s likely that one or more of these strategies could go a long way toward helping you reach your charitable giving goals, this isn’t an exhaustive list of the tools available. More advanced approaches such as charitable remainder trusts, charitable lead trusts and private foundations may be beneficial for those looking to satisfy substantial philanthropic intent. Please reach out to your advisor if you have any questions or to discuss the best options for your situation.
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based on third-party data and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved, determined the accuracy, or confirmed the adequacy of this article. R-23-6491