Now more than ever is the perfect time to give back. With the last two years being some of the toughest for folks around the globe, there are plenty of great reasons to be generous. Giving back to your community or to organizations you care about deeply will help you contribute to making the world a better place. Luckily, giving to charity can also be a great financial decision. In fact, giving can be an essential part of your financial plan, whether it is part of your estate planning, generational wealth planning, or tax planning.
Discover All the Ways to Give
Donating your money to a cause you care about is definitely personally rewarding, but you can also save you some money if you are thoughtful and intentional about your charitable donations. For example, charitable giving is tax-deductible, but only if you itemize your deduction. When you take the standard deduction, your charitable giving has no effect on your taxes. That being said, 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. (1)
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 by law 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.
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. 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 you qualify for. Always include a copy of your receipts with your tax forms as proof.
Which Strategy Will You Use?
Everyone’s circumstances are unique, so a cookie-cutter formula just won’t do. And depending on the current state of your financial portfolio, there may be other ways to maximize your charitable contributions even more. I would be happy to meet with you, take a look at your situation, and see how I can help you maximize your money. Schedule a no-obligation introductory meeting by calling me at (619) 681-1911, emailing email@example.com, or scheduling a time online.
Paul Neves is president and wealth manager at FSI Wealth Management, a leading independent wealth management firm based in San Diego, California. Paul is a CERTIFIED FINANCIAL PLANNER™ professional and a Chartered Financial Consultant®. Working with clients in the financial industry since 1989, Paul has dedicated his life to seeing his clients and their families reach their goals and fulfill the financial plans they have created for their life. He believes that trust and respect are key to building strong, long-lasting relationships with his clients. Paul is known for helping families take the mystery out of preparing for today and tomorrow.
Paul graduated from San Diego State University in 1989 with a bachelor’s degree in business administration, concentrating in financial planning and services. He is currently a resident of Point Loma, California, where he spends his free time with his family and friends either boating, cooking, wine tasting, or traveling. To learn more about Paul, connect with him on LinkedIn.