From celebrating Thanksgiving and ‘Giving Tuesday’ to year-end charitable contributions, the holiday season puts many in the spirit of giving. However, there are opportunities to make your generosity more impactful by taking advantage of tax-smart strategies.
Qualified Charitable Distributions
If you’re age 72 or older, you’re already familiar with having to take required minimum distributions (RMDs) from your tax-deferred retirement accounts. However, you might not think of your RMDs as an opportunity to be benevolent.
Qualified charitable distributions (QCDs) allow you to make non-deductible donations to qualified charities directly from your individual retirement accounts. If you don’t need the cash from your annual RMD, QCDs are a great way to satisfy your required amount and reduce your taxable income. Although RMDs count as income, your qualified charitable distributions do not – meaning if you take your annual RMD and, at some point, give a cash donation to your church, for example, you’ve paid unnecessary tax on that gift. You could have sent $3,000 from your IRA directly to your church and only paid tax on the remaining RMD amount.
Since state and local tax (SALT) deductions were capped at $10,000 in 2017, most people ages 72 and older have been able to leverage this strategy after a simple discussion with their financial advisor.
If you’re not yet 72, there are still strategies that can maximize your charitable gifts. You’ve already paid tax on funds that reside in your bank accounts, so direct donations from your accounts should be bunched together for larger, less frequent gifts to increase your tax deduction.
For example, instead of writing one $3,000 check each year for three years, write one for $9,000 in the first year and forego the gifts in years two and three. If you’re in a financial position to do so, these larger gifts will enable you to save more taxes on your charitable gifts.
Donor-advised funds (DAFs) act like investment accounts – allowing you to save, invest, and grow your assets over time. However, they also allow you to give to causes close to your heart by establishing charities to which money is routinely sent. DAFs provide the benefits of a charity bunching strategy by enabling the full write-off amount in the year the DAF is funded, rather than when the contribution is paid to the charity, but they offer two more valuable perks as well.
First, you don’t have to keep up with receipts for small donations throughout the year. This simplifies your – and your accountant’s – life when tax season rolls around. Second, if your stock investments have appreciated, you can avoid paying taxes on the capital gains by gifting the funds into a DAF. This allows you to claim the full tax deduction. There are additional advanced planning strategies that offer similar benefits of a DAF, but each has a slightly different goal, so be sure to talk with your financial professional before setting up vehicles like charitable remainder trusts.
This holiday season, we thank you for giving to charitable organizations that make a difference in our world. We encourage you to get more bang for your buck – or better yet, more impact for your gift – by talking with your financial planning consultant about tax-smart strategies for giving.