Dan Reiter, CFP®, CPA
For many, charitable giving is a cornerstone of a fulfilling life. It allows us to support causes we deeply care about, contribute to positive change in the world, and connect with something larger than ourselves. But beyond the inherent satisfaction of giving, there are ways to make your charitable contributions even more impactful. Strategic giving allows you to stretch your donation dollars further, potentially receive tax benefits, and ensure your generosity reaches its full potential.
In this post, we'll delve into three key strategies designed to elevate your charitable giving:
As we age and transition into retirement, mandatory withdrawals from traditional IRAs become a reality. For those over 70 ½, these Required Minimum Distributions (RMDs) can potentially push you into a higher tax bracket. But there's a silver lining: Qualified Charitable Distributions (QCDs).
QCDs empower you to donate up to $105,000 (in 2024) directly from your IRA to a qualified charity each year. The beauty lies in how these contributions are treated for tax purposes. The donated amount is excluded from your taxable income, potentially lowering your overall tax bill. This is particularly advantageous if you don't rely heavily on your IRA income to meet your living expenses.
QCDs can also be much more impactful on tax savings than cash donations made outside of an IRA. Let’s illustrate with an example:
Bob and Sue are 74 and 73. They are fortunate enough to receive pensions from their many collective years in government service. As such, they do not need their full required minimum distributions to support their living needs. They wish to give their full $15,000 RMD to their church.
Fortunately, Bob and Sue are very healthy and have very little medical bills. They also have their mortgage paid off and are living debt free in retirement. This also means that they have very little in the way of typical itemized deductions, a category of deductions that includes charitable donations. Taxpayers normally take the most advantageous deduction between the aggregate of all itemized deductions or the standard deduction. Bob and Sue’s standard deduction is $32,300.
In Bob and Sue’s case, they saved over $3,000 in additional taxes by making their donation to the church a qualified charitable distribution rather than just donating cash. Don’t forget - that the amount of the donation was the same in both cases! Qualified charitable distributions are simply a different method of charitable giving that can be more impactful than donating cash alone.
Many of us hold onto stocks that have increased significantly in value over time. Selling these stocks to generate cash for charitable giving can be tempting. However, there's a far more tax-efficient strategy: donating the appreciated stock directly to a qualified charity.
Here's why it's so beneficial: When you sell appreciated stock, you incur capital gains taxes on the increase in value. Donating the stock directly bypasses this tax burden altogether. Even better, you can still receive a tax deduction for the full fair market value of the stock on the date of donation. This double tax benefit significantly amplifies the impact of your charitable contribution.
For instance, imagine you own stock that you purchased for $5,000 and it's now worth $15,000. Selling it to donate the proceeds would result in a $10,000 taxable capital gain. Assuming you are subject to a 15% capital gains tax rate, this could result in additional tax of $1,500 when you file your return. Ultimately, you would net $13,500 in cash following the sale of the stock.
However, if you donate the stock directly, it allows the charity to receive the full $15,000 value. Moreover, if certain requirements are met, you would be eligible for the full $15,000 tax deduction, maximizing your charitable impact and minimizing your tax liability! Because of this dual tax benefit of donating appreciated stock, it almost always makes sense to donate appreciated shares over cash when the option is available.
A couple of caveats with this strategy, though. First, you are only eligible to take a full deduction for stock donated that you have held for more than one year. Second, depending on the charity, they might not be set up to receive stock as a donation. If this is the case, don’t fret! There might be a workaround. You could consider setting up a donor advised fund, a type of account established that can accept stock as a charitable donation, allow you to sell it (tax free), and direct where to send the cash from the sale. Many community organizations and financial institutions, such as Fidelity Charitable, allow you to create such accounts.
Are you a consistent donor to your favorite charities, but don't typically itemize your deductions on your tax return? This might be because your total charitable contributions haven't exceeded the standard deduction in any given year (like Bob and Sue in our first example). However, a strategic approach called "bunching" can unlock significant tax benefits.
Bunching involves grouping several years' worth of charitable contributions into a single tax year. By exceeding the standard deduction with your bunched donations, itemizing deductions becomes advantageous. This can potentially lower your taxable income and translate into significant tax savings.
Let’s go back to our example of Bob and Sue from the first strategy (on qualified charitable distributions). Let’s say that they do not have any IRA dollars, however, and simply want to give $15,000/year to their church. In other words, they plan on giving $45,000 to their church over the next three years. In Scenario 1, we assume they continue to give $15,000 per year as planned. In Scenario 2, we assume they give $45,000 in the first year, and $0 for years two and three.
Similar to the discussion in the QCD strategy for Bob and Sue, donating $15,000/year is not sufficient to put itemized deductions at a level that is higher than the standard deduction. As such, donating $15,000 in any one individual year yields no tax benefit to them.
If Bob and Sue were to bunch their contributions in one year, though, it allows them to create a tax benefit by increasing their itemized deductions to a sufficient level in one year. Note that in both scenarios, they gave the same $45,000 over the next three years. However, donating the full $45,000 amount up-front saved them about $3,000 in total federal income taxes.
While bunching can be a powerful tool, it's crucial to consult with a financial advisor to ensure it aligns with your overall financial goals and tax situation. Factors like income fluctuations, cash needs, and future charitable giving plans need to be considered to maximize the effectiveness of this strategy.
These are just a few key strategies to elevate your charitable giving. Remember, consulting with your tax and financial advisor is essential to determine the best approach for your unique financial situation. If you are interested in discussing charitable strategies that are available to you as part of your overall financial plan, give us a call at (816) 587-7526 or schedule a no-obligation thirty-minute call.
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