Reduce Taxes with Charitable Giving

by | May 24, 2024

Charitable giving not only supports meaningful causes but can also help reduce taxes if done strategically through gifting appreciated shares, Qualified Charitable Distributions (QCDs), and Donor-Advised Funds.

Smarter Ways to Give to Charity and Save on Taxes

Giving to charity is a noble act that supports important causes and communities. However, many people give to charities in cash without realizing there are more beneficial ways to make donations, both for the charity and for their own financial health. This article will explore four advanced strategies for charitable giving, including gifting appreciated securities, using qualified charitable distributions (QCDs), bunching donations, and contributing to donor-advised funds (DAFs) to help reduce your taxes.

1. Gifting Appreciated Securities

Instead of giving cash, consider donating shares of appreciated stocks or mutual funds. If you own securities in a non-IRA account, such as a brokerage or trust account, and those securities have appreciated in value, you can transfer them directly to a charity. This method offers two major tax advantages:

  • Avoid Capital Gains Tax: By donating the appreciated securities, you avoid paying capital gains tax on the unrealized gains if the unrealized gains are long-term in nature.
  • Full Market Value Deduction: You can deduct the full market value of the securities at the time of the donation from your taxable income (charitable donations and other itemized deductions must exceed the standard deduction amount for any tax benefit to result).

For example, if you bought Apple stock for $10,000 and it has appreciated to $20,000 over the course of more than 12 months, donating the stock directly to a charity allows you to avoid paying long-term capital gains tax on the $10,000 gain. Additionally, you can use the full $20,000 as an itemized deduction.

2. Qualified Charitable Distributions (QCDs)

QCDs are a powerful tool for those over 70½ years old with an IRA. Instead of withdrawing money from your IRA, paying taxes on it, and then donating to a charity, you can direct your IRA custodian to transfer the funds directly to the charity. This method offers several benefits:

  • Satisfy Required Minimum Distributions (RMDs): If you are required to take RMDs, a QCD can count towards this requirement.
  • Tax-Free Distribution: The amount transferred directly to the charity is not included in your taxable income, which can lower your overall tax bill.

For instance, if you need to withdraw $40,000 from your IRA to meet your RMD and you wish to donate $10,000 to charity, you can use a QCD to send $10,000 directly from your IRA to the charity. You will only pay taxes on the remaining $30,000.

3. Bunching Donations

“Bunching” donations is a strategy where you consolidate several years’ worth of charitable donations into a single tax year to exceed the standard deduction threshold and itemize your deductions. This can maximize the tax benefit of your charitable giving.

For example, instead of donating $10,000 each year, you might donate $20,000 in one year and nothing in the next. This way, you can itemize your deductions in the year you bunch your donations, potentially exceeding the standard deduction and gaining a tax benefit.

4. Donor-Advised Funds (DAFs)

A DAF is a charitable investment account that allows you to make a large charitable contribution in one year, receive an immediate tax deduction, and then distribute the funds to charities over time. This strategy is ideal for those who want to “mega bunch” their donations:

  • Immediate Tax Deduction: You receive the tax deduction for the full amount in the year you contribute to the DAF.
  • Flexible Distribution: You can distribute the funds to various charities over several years according to your philanthropic goals.

For example, if you want to donate $10,000 annually for the next 10 years, you could contribute $100,000 to a DAF this year. You get the tax benefit for the entire amount now, and you can recommend grants to charities from your DAF over the next decade.

Combining Strategies for Maximum Benefit

You can combine these strategies for even greater tax benefits. For example, you could donate appreciated securities into a DAF, combining the tax advantages of avoiding capital gains with the flexibility and immediate deduction of a DAF. This “double whammy” approach maximizes your tax benefits while ensuring your charitable contributions are strategically managed.

Conclusion

Giving to charity is commendable, and optimizing your donations to maximize tax benefits is a smart financial move. By using strategies like gifting appreciated securities, QCDs, bunching donations, and DAFs, you can support the causes you care about while also benefiting your financial health. If you’re unsure which strategy is best for you, consider consulting with a financial advisor to tailor your charitable giving to your financial situation and philanthropic goals.

For more information and personalized advice, visit retirementpowerhourpodcast.com, where you can submit questions or schedule an introductory call to explore how these strategies can benefit you.

Want more help? Let’s chat.

Joe Allaria, CFP®

Joe Allaria, CFP®

Wealth Advisor | Partner

As featured in The Wall Street Journal, USAToday.com, CNBC.com, Nasdaq.com, and Yahoo Finance.

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