Philanthropic giving by Americans in 2021 totaled nearly $485 billion! Of that amount, individuals like you gave 67% or $327 billion. Question: Are you using the best strategy and getting the most “bang for the buck” when donating to your favorite charity?
Donating cash to charities continues to be the most common and convenient way to give. However, other advantageous and tax-efficient strategies exist that can provide even more value than simply a tax-deduction when supporting your favorite non-profits.
Gifts to qualified non-profit organizations can reduce your taxable income if you itemize your deductions on Schedule A of your tax return. To itemize deductions, total deductions must exceed the standard deduction amounts set by the IRS annually, depending on filing status. The 2023 standard deduction amounts are as follows:
- Single & Married Filing Separately: $13,850
- Head of Household: $20,800
- Married Filing Jointly: $27,700
Tax filers over age 65 or filers who are blind can deduct an additional $1,500 in addition to the amounts listed above. The additional amount increases to $1,850 if filing single or head of household.
If you itemize deductions and give to charities, the amount you can ultimately deduct depends on the type of charitable donation made. If you cannot deduct the full amount of your charitable contributions in one year, the unused portion can be applied to future tax returns for up to five years.
Gifting Cash vs. Appreciated Securities
Making gifts to charity by cash or check is one of the most common ways individuals support non-profit organizations, which is understandable given the ease and convenience of this method. When making a gift of cash or by check, 100% of your donation is deductible up to 60% of your adjusted gross income (AGI) if you itemize your deductions on Schedule A.
When might you consider a gift of appreciated securities versus gifting cash? This gifting method would be appropriate for someone who owns a security (stock, bond, mutual fund, etc.) that has increased in value since the time of purchase or acquisition. If you have owned the security for 12 months or more, 100% of the fair market value is deductible up to 30% of AGI if deductions are itemized.
In addition to the deduction, you avoid any capital gains tax owed on the appreciation of the security. Since charities are tax-exempt, the charity will not owe capital gains tax upon sale of the security. A win-win!
Donor-advised funds (DAFs) or charitable gift funds are investment accounts earmarked for charitable gifting purposes. Contributions to DAFs are treated as gifts to a qualified charity and are tax-deductible in the year the contribution is made. Contributions to DAFs can include gifts of cash, securities, or tangible assets. DAFs are typically established with financial institutions and community foundations.
When should you consider using a DAF? An example of when this is a beneficial strategy is when you have a high-income year. Making a large contribution to a DAF will reduce your tax liability during the high-income year. You can then make distributions to charitable organizations from the DAF in the current as well as future years. These distributions are not deductible when made. Only the initial contribution to the DAF is deductible on Schedule A of your tax return.
Simplicity is another factor. If you make multiple charitable gifts each year to various charities, you are required to enter information on Schedule A for each donation. To simplify this process, you can make one contribution by establishing a DAF and then distribute the gifts to multiple charities from the account. In this situation, only your contribution to the DAF is recorded on Schedule A.
Qualified Charitable Distribution
The IRS defines a qualified charitable distribution (QCD) as an otherwise taxable distribution from an IRA owned by an individual who is age 70.5 or over that is paid directly from the IRA to a qualified charity. The maximum amount an individual can donate via QCD annually is $100,000. If married, each spouse can make a QCD up to the $100,000 limit.
Unlike the strategies discussed previously, QCDs are not deductible for tax purposes, but the direct distribution to charity is not included on your tax return as a taxable IRA distribution. Please note that QCDs cannot be donated to a donor-advised fund (DAF).
When might you consider a QCD? Again, you must be age 70.5 or older to make a direct donation to charity from your IRA. Further, consider a QCD if you have an IRA with a large value and want to reduce taxable required minimum distributions (RMDs) in a future or current year. And once you’ve reached RMD age, QCDs count towards the amount you must take from your IRA within a certain tax year.
Have you considered incorporating your favorite non-profit into your estate plan? One way you can do so easily is by naming a charity as a retirement account or life insurance policy beneficiary. Aside from leaving the full value of the asset, you can also choose to leave a certain dollar amount or a percentage of the account value (or death benefit) to the charity as beneficiary. Since qualified charities are tax-exempt organizations, your charity of choice will not owe taxes on the gift when received.
There are many different ways to support charitable causes aside from making financial gifts. Gifts of time and expertise are also highly valued by charitable organizations. If you donate monetarily to charity, reevaluate your strategy for simplicity or tax efficiencies. Use your financial advisor and CPA as resources when developing your gifting strategy.
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This article is not intended to provide tax or legal advice, and nothing contained in these materials should be taken as such. All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the article. The material has been gathered from sources believed to be reliable, however Bedel Financial Consulting, Inc. cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Advisory services are only offered to clients or prospective clients where Bedel Financial Consulting, Inc. and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Bedel Financial Consulting Inc. unless a client service agreement is in place.
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