Each of us has experienced firsthand the maxim that it is better to give than to receive. And charitable giving can be an essential part of your wealth management strategy—whether it’s part of your estate planning, generational wealth planning, or tax planning. As the end of the year draws near, with another year around the corner, it might be the perfect time to reevaluate how you give and how to maximize your tax strategy as part of your charitable giving plan.
Let’s take a look at several different ways to gift.
Discover All the Ways to Give
Donating your money to a cause you care about is certainly personally rewarding, but it can also save you money if you are thoughtful and intentional about your charitable donations. While charitable giving is tax-deductible, you will only get the benefit if you itemize your deductions. This means that taking the standard deduction will make your charitable giving meaningless for your tax deduction. This is a perfect example of why you should align your giving with your overall wealth strategy.
So, before simply writing a check to support your favorite charity, consider incorporating one of these giving strategies that could maximize your generosity.
Donor-Advised Funds (DAFs)
Donor-advised funds (DAF) are charitable giving programs that allow you to combine the tax benefits of giving with the flexibility to support your favorite charities.
Contributions to your DAF can provide a current year’s tax deduction, then be invested to grow tax-free. This may result in more dollars for the organizations you support when you decide to transfer the assets. The funds allow you to contribute anything from cash to appreciated securities to real estate to life insurance that can help to further lower your tax bill. If you donate cash, you typically receive an income tax deduction of up to 60% of your adjusted gross income (AGI). If you donate appreciated securities, you save on the capital gains tax and your deduction will be the full fair market value, up to 30% of your AGI. In big tax years due to the sale of a business or significant asset, overfunding a DAF is a common strategy to maximize the bang for your buck.
Once the money is out of your hands, you don’t have legal control over it. But you are the decision-maker when it comes to how the funds are invested and when they are distributed to the charities you recommend. According to the legal setup of these accounts, the organization that holds your DAF isn’t required to follow your “advice,” but there’s an understanding that they will.
Gifting Your RMD
A simple example that takes advantage of tax benefits and minimizes your taxable income involves the required minimum distributions (RMDs) you are required to withdraw from your retirement accounts when you turn 72. But what if you don’t need that money for living expenses? Current tax law allows you to gift your RMD directly to a charity and avoid paying taxes on the distribution. This can be a great strategy for those with sufficient income streams who don’t want to pay excessive taxes.
Qualified Charitable Distributions
If you have an IRA, you may be able to get a tax benefit for your charitable donations through a qualified charitable distribution (QCD), even if you take the standard deduction. QCDs are distributed directly from your IRA account to the charity of your choice. It can count toward your required minimum distribution (RMD) for the year, and it does not count toward taxable income, so you don’t have to pay any taxes on it.
Charitable Remainder Trusts
A charitable remainder trust (CRT) is a trust that not only provides an income stream but passes the remaining value to charities of your choice when you or your beneficiary dies. It allows you to convert an appreciated asset into lifetime income. With the trust, you technically donate the asset to charity before it is sold, which allows you certain tax benefits, including a charitable deduction. You will receive more income over your lifetime by using a charitable remainder trust than if you had sold the asset yourself, and you even gain creditor protection for it. It also provides other important tax benefits and, best of all, you get to contribute to charitable causes that are near and dear to your heart. And unlike DAFs, you always have control of the trust. Your trustee manages the assets, but they must follow the instructions you have indicated and make changes per your direction.
Stay Organized
All of your charitable contributions can be filed with your taxes, qualifying you for certain tax deductions and reducing your overall tax bill. Make sure to always ask for a receipt anytime you give a donation (cash or non-cash), and file it safely with the rest of your financial documents and with your financial professional. When giving certain types of appreciated assets, a qualified appraisal may also be required for inclusion with your tax return to support your charitable deduction. Once tax season arrives, bring your receipts and your paperwork to your CPA so you can get an accurate picture as to which tax deductions make sense for your donations. Always include a copy of your receipts with your tax forms as proof.
Which Strategy Is Best for You?
No two individuals’ circumstances are exactly alike, so a cookie-cutter formula won’t work. And depending on the current state of your financial portfolio, there may be other ways to maximize your charitable contributions even more.
At Solidarity Wealth, our team members have backgrounds as tax attorneys and accountants; that combined with our deep experience advising founders and executives makes us highly knowledgeable in guiding clients like you to maximize their wealth. We would be happy to meet with you, take a look at your situation, and see how we can help with both your tax planning and wealth management.
If you’re ready to see what our advanced team of wealth and investment advisors can do for you and your business, reach out to us at info@solidaritywealth.com or call 385-374-1665 to schedule a discovery call.
About Jeff
Jeff McClean is a co-founder, partner, and wealth advisor at Solidarity Wealth, a privately held, independent wealth management firm that serves as a multi-family office to some of the Mountain West’s most successful families, technology entrepreneurs, and executives. He specializes in helping clients navigate the unique challenges of significant wealth and better predict their financial future.
As a former tax and estate planning attorney, Jeff is uniquely qualified to advise clients on their overall wealth to help them understand how the pieces of their financial puzzle fit and work together to meet their goals and build the best plan for their future. He values building personal relationships with clients and offering recommendations as a trusted partner, focusing on helping them grow in their financial confidence and freedom to choose their path.
Jeff holds a bachelor’s degree in accounting from Brigham Young University – Idaho and a Juris Doctor with honors from the University of Texas School of Law. Outside of work, he is a huge sports fan and enjoys spending time with family, golfing, and skiing. He also serves as President of the Salt Lake Estate Planning Council and is a frequent speaker on tax and estate planning topics. To learn more about Jeff, connect with him on LinkedIn.
Solidarity Wealth is a registered investment adviser. This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Solidarity Wealth and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Solidarity Wealth unless a client service agreement is in place.