Tax-Efficient Giving
By: Cameron Diehl, CFP®
Friends – Many of my clients are charitably inclined, giving generously of their “time, talent and treasure” to causes they care about year after year. When giving your “treasure” a little planning can go a long way to make sure you take full advantage of tax saving opportunities.
Given some of the complexity added by recent tax law changes, I wanted to share a few thoughts on the topic well in advance of the year-end rush that typically accompanies a lot of giving.
- Deductibility Limited – Donations to qualified charities can provide tax deductions up to certain limits each year. These deductions become more valuable the higher your tax bracket and the more you give. However, to claim these deductions, you must itemize your deductions on your tax return. With recent tax reform increasing the standard to $24,400 for a married couple filing jointly in 2019, far fewer taxpayers will end up itemizing, significantly reducing or completely eliminating the value of their charitable deductions.
- Bunching Donations – One strategy that has grown in popularity recently is to pull forward multiple years’ worth of gifts and “bunch “ them into a single year to take a bigger deduction in excess of the standard deduction in one year and continue claiming the standard deduction in others, thus maximizing total deductibility of your gifts.
- Gifting Appreciated Securities – By donating shares of highly appreciated stocks, mutual funds or other securities you can realize a number of additional benefits over giving cash. When you give these shares, you receive a tax deduction for the full market value of the donation, are able to forego capital gains taxes you would have realized by liquidating the stock, pass along an even greater donation to your charity and create an opportunity to rebalance your portfolio with reduced tax consequences.
- Donor-Advised Funds – An incredibly useful tool to combine bunching deductions and gifting appreciated securities is a donor-advised fund. These funds are easy to set up and provide significant control and simplicity for your giving. When you make a contribution, you are able to deduct the full value of your gift in the year it is made, continue to invest it to grow over time and direct future distributions at the time of your choosing. This works particularly well if you wish to “bunch” a gift of appreciated shares in a particular year in line with your broader financial plan.
- Qualified Charitable Distributions – If you or someone you know is charitably inclined, over 70 ½ and subject to required minimum distributions (RMDs) from their IRAs each year, another option to consider is a qualified charitable distribution (QCD). By making a distribution directly from your IRA to a qualified charity, you are able to avoid income taxes that would normally be due on that portion of your RMD (though you cannot double dip and also deduct the gift as a charitable contribution).
- Significant Gifting – For significant, longer-term gifting, there are a number of more sophisticated options to consider as part of your overall financial and estate plan including charitable trusts, life insurance, etc. These are more complex and require in depth planning, but can have substantial benefits if implemented thoughtfully.
There are important limitations regarding what qualifies and limitations on overall deductibility, so it’s important to coordinate with your tax and financial advisor before making any significant gifts. That being said, if you regularly give to any causes, whether your alma matter, church, synagogue, a favorite charity or other causes, these concepts are worth exploring, as the tax savings can be quite impactful.
If you think any of these may apply to your situation, let’s discuss. I’m always happy to help.
