Simple Charitable Giving Strategies to Save on Your Taxes
Non-profits depend on people like us to further their mission and to help those most in need. Giving is essential—both for the organization receiving the gift and for the donor who gains the satisfaction of taking part in a larger cause. The old adage “Tis better to give than receive” has stood the test of time because it is so very true.
You should approach giving with diligence and with purpose. Everyone benefits from your generosity.
Tax law has changed significantly in the last few years. Now that the standard deduction is higher, many taxpayers who have itemized in the past no longer receive financial benefits from itemizing. As a result, charitable gifts no longer reduce taxes for these folks. Tax deductions you have been receiving for decades may no longer be available to you.
But you want to keep giving, regardless of whether or not you receive tax benefits. The non-profits you love need your support to further their mission, especially in light of the global pandemic and all of the ripple effects that have played out since early 2020.
How can you continue to give, but ensure that you give in the best way possible to minimize taxes for you and your family? We have some ideas below. When you pay less in taxes, you have more to spend while creating memories with your family or give away.
Please don’t cut back on your giving because of the tax law changes. Instead, take a thoughtful approach to your gifts to make sure you are taking advantage of all of the strategies available to you.
When you pay less in taxes, you have more left for the most important things in your life.
We understand your desire to give and have these discussions with clients all the time. Below are some examples of the common strategies that we use often.
Qualified Charitable Distributions (QCDs) from your IRA: If you are over age 70½ you can make direct gifts from your IRA to the non-profits you support. Essentially, the custodian of your IRA can cut a check from your account and send it directly to the nonprofit. This withdrawal does not count as taxable income to you, and you also do not receive a charitable deduction for it. Even though you do not receive a charitable deduction, you still benefit by avoiding the tax on the IRA distribution.
You can begin this strategy at age 70½. The SECURE Act was signed into law in late 2019. This law increased the age at which you must take your required minimum distributions (RMDs) to age 72, but did not affect your ability to make QCDs at age 70½. Any amount sent as a QCD will count toward the total amount needed for your RMD.
Commonly, we advise clients to shift their giving from writing checks to sending out QCDs. These can be sent annually, quarterly, or monthly. The process is really quite simple—your advisor can likely send the forms for you to sign electronically. You can click to sign from your computer, tablet, or smartphone.
Note that the custodian of your IRA is not responsible for the tax reporting of the QCD. Before initiating QCDs, confirm that the non-profit currently meets its tax-exempt status. You will also want to keep track of the total amount of QCD each year and indicate this amount on your taxes. The 1099 that you receive each year may not indicate the distribution was non-taxable, so keep good records and double-check the numbers. A few minutes of good record keeping can save you several thousand dollars.
Donor-advised funds: Is your taxable income higher this year than you expect it to be in the future? Perhaps you are retiring soon and are moving to a lower tax bracket. Or maybe you have a large windfall this year, which you do not expect to continue.
When you set up a donor-advised fund and transfer money into it this tax year, you can receive a large tax deduction for the amount of your gift based on your current tax bracket. So, you get the tax deduction now, and the money can be invested to grow and then be sent out to non-profits in future tax years. You receive the tax deduction while you are in a higher tax bracket, and then send the funds out later when your bracket should be lower.
Please keep in mind that any money invested into a donor-advised fund is no longer your money and you cannot reclaim it. The money has to be distributed to a 501(c)(3) organization.
To decide if a donor-advised fund is right for you, a good financial advisor or CPA can meet with you to determine your current tax situation and to project where you may be in a few years. You will make the best decision if you share your goals with your advisors so that they can help you properly balance the tax benefits and giving goals.
Appreciated stock gifts: Have you owned a stock or mutual fund for several years that has a substantial gain? If you sell this position, you will pay capital gains taxes. Often, it makes sense to transfer the appreciated stock or fund directly to a nonprofit. The nonprofit receives the shares, and then sells the position shortly after they receive it.
You avoid the capital gains tax. The non-profit receives the proceeds tax-free, and benefits the same as though you wrote them a check. Sounds like a win-win to me!
If you are considering the strategy, make sure that you have owned the position for more than 12 months. Otherwise, you may still incur capital gains.
Itemizing every other year: Some people may save money on their taxes by sending out charitable gifts in late December for the following year. Essentially, you itemize in the years when you double up your giving, and take the standard deduction in the other years.
Your financial advisor or CPA should be able to calculate the amount of tax savings or utilizing the strategy. This strategy can work best with younger taxpayers who give significantly and have other itemized expenses, such as mortgage interest.
Before implementing this strategy, you may want to check with the non-profits you support. Sometimes they prefer current year gifts and your planning strategies can create additional confusion or administrative hurdles for them. You do not want to do anything that will distract them from their mission.
Some givers may also want to consider more complex strategies, such as Charitable Remainder Trusts, Charitable Lead Trusts, and Charitable Gift Annuities.
When you give with purpose and intention, you can often pay less in taxes so that you can have more for what is most important.
Who is going to get more of your hard earned money? The non-profits you support, your family, or Uncle Sam?
Our team would be honored to talk about what is most important to you.
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For more helpful content, please visit our blog page or video page for similar articles and videos to assist you in planning. We also have created FREE DOWNLOADABLE GUIDES, such as Five Tax Strategies Retirees Often Overlook and Six Mistakes Grandparents Often Make
*Neither LPL Financial nor Larson Wealth Management provide tax or legal services