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TCBN Article:  Give More, Pay Less:  Tax-intelligent charitable giving strategies

TCBN Article: Give More, Pay Less: Tax-intelligent charitable giving strategies

March 07, 2024

Several years back, the Tax Cuts and Jobs Act nearly doubled the standard deduction while restricting the state tax deduction. A significant number of taxpayers shifted from itemizing deductions to claiming the standard deduction. As a result, you may not be receiving the incremental tax benefits from your charitable contributions as in the past. If you like the idea of helping others, a handful of strategies exist to help you give more while paying less in taxes.


The most direct approach: gifting appreciated stock or mutual funds directly to a charitable organization. These appreciated investments have untaxed gains and by gifting them, you avoid having to pay capital gains tax on the investment’s growth. This type of gifting directly translates into the goal of gifting while also receiving a tax deduction.


However, an investor may still desire a stream of income while being charitability inclined. It is possible to generate income from those appreciated securites before they are donated by establishing a Charitable Reminder Trust (CRT). The first step is to create the Trust. Assets are then into the CRT and the charity or charites that will ultmately benefit are chosen. Beneficiaries of this irrevocable trust are required to receive between 5% and 50% of the income annually for not more than 20 years. Afer which tme, the assets are distributed to the predetermined charity or charities.


If generatng income is not your goal, perhaps a Donor Advised Fund (DAF) is better suited. A DAF is an irrevocable transfer of assets, often highly appreciated securites, with the specific intent of funding charitable gifts. Rather than declaring charitable beneficiaries, the DAF architecture provides simple, flexible, and efficient ways to manage charitable giving. One of the biggest benefits is the ability to gift a lump sum to the DAF to offset a particularly high tax bill. The lump sum donation can then be spread across multiple gifts (grants) and for many years – as long as the assets last. As donor, you direct the grant recipient, grant amount and the timing of when the charity received the funds. This strategy can also be used to create a family gifting legacy.


Already in your retirement years? A Qualified Charitable Donation (QCD) allows the transfer of up to $100,000 in tax-deferred retirement savings to the qualified charity of your choice, tax-free. Instead of liquidating pre-tax IRA assets, paying taxes and then donating the proceeds, you simply donate the money directly and avoid the taxable event. QCDs are both exempt from income tax and not reportable as adjusted gross income (AGI) on a tax return. As a result, they can be used to offset Required Minimum Distributions. A retired investor can start using QCDs to their advantage at the age of 70-1/2.


Lastly, charitable contributions can be bunched – using a combination of any of the previously mentioned techniques - into a larger lump sum once every couple of years. The intent here is to exceed the standard deduction once every few years with a large charitable contribution allowing you to itemize your deductions and receive an incremental tax benefit. In off years you simply take the standard deduction.


Working with a Certified Financial Professional™ can help you maximize your charitable impact while optimizing your tax situation. Your tax-savvy financial professional will help you determine which strategy or strategies will most efficiently meet your charitable and personal financial goals.