Most families are familiar with the charitable gifting tax concept. You give money to a qualified charity and if you itemize your deductions, you can deduct these contributions from your AGI up to a certain amount based on your income. While the OBBBA has changed some details to this, the concept largely remains the same. However, this is just scratching the surface. For several clients, you can get a much larger long term advantage with some strategic planning. Here are a few ways families can maximize the tax advantage of their charitable contributions, depending on their situation.
Gift appreciated securities rather than stock
Families commonly approach their charitable gifting by simply writing a check from their earned income for the year. While this does give an advantage, many families have stock or other securities they have held for a long time and it would cause a significant capital gain to sell. Families can donate this stock to a charity and get the same deduction that they would with cash (subject to a lower AGI ceiling), and never have to recognize the capital gain.
Thinking about retiring soon? Frontload contributions now.
For families currently earning high income and looking to retire soon, this could put you in a significantly lower tax bracket down the road. This means you would get a larger tax advantage from charitable gifting now. Rather than spreading out your gifting, make larger contributions in the years you earn the high income to maximize your potential deductions. This can be even more strategically planned with the next strategy.
Consider a Donor Advised Fund (DAF)
A donor advised fund is your own personal charitable fund that can be opened with most custodians. In essence, it serves almost like your own foundation. Contributions to a DAF are irrevocable. However, you get the tax deduction immediately upon contribution. These funds then sit invested and growing until you decide you would like to send a check to a certain qualified charity. This strategy is great because it allows you to contribute appreciated stock and get the same tax advantage. Moreover, you can front load your contributions while you are earning high income. These assets can then continue to grow as you make your charitable contributions over numerous years.
For retirees, consider qualified charitable contributions (QCD’s)
Required minimum distributions (RMD’s) require significant financial planning strategies for many families. Upon attaining age 73, an IRA owner must distribute an IRS determined amount from their account each year and pay taxes on this distribution. Many IRA owners find this means they will have to distribute and pay taxes on money they may not even need. However, upon attaining age 70 and a half, the IRS allows for qualified charitable distributions from an IRA directly to a charity. Rather than deducting these contributions below AGI, this allows a retiree to move the contribution directly to the charity, as if the IRA distribution never happened. This could help retirees who do not need the RMD’s for their personal use to completely eliminate part or all of their RMD’s from their taxable income, while benefitting their favorite charities.
Charitable trusts
Some families with high asset levels are at risk of gift and estate taxes. While an in depth discussion of charitable trusts is beyond the scope of this article, these complex trusts can help some families benefit their heirs and charities, while keeping the funds out of their gross estate and in danger of the estate tax. It is important to consult with your financial team and estate attorney about these strategies if you are in this situation.
Conclusion
These are only a few of the numerous ways to maximize charitable planning. It is important that you consult with your advisor and tax professional prior to making any decisions related to advanced charitable planning. Boyce & Associates would be delighted to serve as an asset when making these decisions.
DAF Disclosure: A donor‑advised fund is a charitable giving account held at a sponsoring organization (e.g., Fidelity Charitable, Schwab Charitable, a community foundation). When you contribute to a DAF, your contribution becomes an irrevocable charitable gift and the assets legally belong to the sponsoring nonprofit.
