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By Adam E. Day, Financial Advisor
Charitable giving is an American tradition, we even have a season called ‘giving season’, where many of us attend or know of someone attending galas, fundraising dinners and much more in the hopes to maximize the impact of the projects that we are passionate about. Most charitable organizations share the goal of improving quality of life, and philanthropy is a major source of funding for humanitarian causes, religion, education and the arts. In 2021, Americans hit a new giving milestone of $485 billion to charities —the majority of which came directly from individuals. In fact, over the past two decades, total charitable giving in the United States has grown 83% when adjusted for inflation. When it comes to giving, Americans are not only generous with their dollars, but with their time too. Over the last several years, over 60 million adults have volunteered billions of hours of service on an annual basis. (1)
Although there are many reasons that Americans give to charity, it often centers on wanting to pass on their family’s values and the desire to help others. While, getting a possible tax benefit.
We as Financial Advisors, have conversations with clients every day about their passions when it comes to being charitable. Often we find that there are a few ways that they can tweak their current strategy in order to become more efficient and maximize their long-term impact. Here are a few strategies that one should consider for their plan for more efficient Charitable Giving.
1. Bunching cash gifts.
This strategy is more common now than it was before the passing of the Tax Cuts and Jobs Act in 2017. This change in the tax code doubled the Standard Deduction, simplifying most Americans tax filing. However, with filing, to receive any benefit from cash donations, the family or individual needs to have enough itemizations to exceed the standard deduction. In order to pass this threshold, one strategy that some deploy is giving numerous years of planned gifts in one year, instead of spreading out over multiple years. Let us look at an example:
(In 2022) the Smith Family is planning to give $6,000 per year, every year, to their local church that is properly set up as a 501c3. For tax purposes, they are Married Filing a Joint Return. Their current total other itemizations are $10,000. If they give $6,000, as planned, to their church, they would have $16,000 in itemizations, which is not greater than the standard deduction for 2022, which is $25,900. Therefore, while the church receives the funds, the Smiths do not get a direct tax-impact from the gift. In an alternate strategy, the Smiths can give the next 5 years’ worth of gifts, in 2022, which would make their total Itemizations $40,000 ($6,000 X 5 +$10,000). Since this is a greater number than the standard deduction, they do get to take the itemized deduction, which would reduce their taxes in 2022.
This information is hypothetical and is provided for illustrative and informational purposes only. It is not intended to reflect any particular structure or situation.
2. Gift Appreciated non-cash Assets
Donating long-term appreciated assets is a smart charitable planning strategy because there is dual effect. First, one is generally entitled to the full fair market value (FMV) tax deduction at the time of the gift. Additionally, one may be able to eliminate capital gains taxes when they give these assets directly. Through these combined tax saving opportunities, one may be able to give more to charity compared to selling the asset and donating the cash proceeds. Common assets that are used in this strategy are:
· stocks
· bonds
· mutual fund shares
· life insurance
Less common, but still useable assets are:
· private or restricted company stock
· shares of a privately owned business
· real estate
Let us look at a comparison. In this scenario, the donor:
· Is in the 37% federal income tax bracket
· Has an asset that has an Fair Market Value of $50,000 that includes unrealized gains of $30,000 subject to a 20% capital gains and 3.8% Medicare Surtax.
With this scenario comparison, we can see that in Scenario B, the donor would be able to eliminate capital gains tax and therefore donate an additional $7,140 to charity as well as receive a larger income tax deduction. A win-win, in our opinion.
Limitations apply to how much can be deducted from one’s income when donating appreciated securities so it is important to speak with a tax-advisor ahead of making any final decisions.
This information is hypothetical and is provided for illustrative and informational purposes only. It is not intended to reflect any particular structure or situation.
3. Set up a Charitable Fund.
There are a variety of giving vehicles that can support charitable giving during one’s lifetime. The most common is a Donor Advised Fund.
A Donor Advised Fund, or DAF, is a charitable giving vehicle sponsored by a public charity that allows you to make an irrevocable contribution to that charity and be eligible for an immediate tax deduction. You can then recommend grants over time to any IRS-qualified public charity. The initial contribution used to establish a DAF can be minimal compared to other giving vehicles.
Benefits(2):
· Take an immediate tax deduction for one’s charitable contribution.
· Support the charities one cares about right away or over time.
· Potentially grow the donation tax-free by investing the funds until a grant is made.
· Streamlined recordkeeping and consolidate tax receipts, all in one centralized, location.
· Support charitable causes anonymously, if one wishes.
Considerations:
· While one may choose where to make grant recommendations, the sponsoring charity has ultimate control over the grants.
· Sponsoring charities of the DAF are required by law to ensure that grants are only made to qualified charities and are used exclusively for a charitable purpose. Consequently, grants cannot be used to support non-501(c)(3) entities or be used to satisfy binding pledges.
Commonly DAFs will be used in combination with the first strategy of bunching gifts. As an example:
Mr. Green, a donor, knows that he and his spouse are planning to gift to charities every year in retirement. Mr. Green is set to retire this year and when he does so, his private stock in Green Manufacturing Co. will automatically pay to him as income. He knows that because of this, he will have a higher tax year. He may consider making a large contribution to the DAF, which can continue to grow and potentially sustain their charitable inclination throughout retirement. He can reduce his income now, and have a charitable fund to grant from for many years to come.
This information is hypothetical and is provided for illustrative and informational purposes only. It is not intended to reflect any particular structure or situation.
4. Consider a Qualified Charitable Distribution
As a result from the Tax cuts and Jobs Act as we discussed previously, fewer taxpayers itemize deductions on their tax returns.
However, if a donor is age 72 or older, they can use a Qualified Charitable Distribution (QCD) to donate from an IRA and get a tax break, whether they itemize or not. This is the same starting age for taking annual required minimum distributions (RMDs) from traditional IRAs, which are normally taxed as ordinary income, or face a 50% penalty on the amount that should have been withdrawn.
QCDs satisfy all or part of any RMDs that one would otherwise have to take from an IRA. Better yet, QCDs are excluded from one’s income, so it helps lower adjusted gross income (AGI) as well.
How QCDs Work
The IRA custodian must issue a check made out to a qualified public charity (not a private foundation, donor-advised fund, or supporting organization). Donors must wait until after age 72 to make a QCD up to a maximum $100,000 per year. If the donor is married, their spouse can also contribute up to $100,000 from their own IRA. One cannot deduct a QCD as a charitable contribution on a federal income tax return — that would be double-dipping.
A QCD must be an otherwise taxable distribution from the donor’s IRA. If one has made non-deductible contributions, then each distribution normally carries with it a pro-rata amount of taxable and nontaxable dollars. With QCDs, the pro-rata rule is ignored, and taxable dollars are treated as distributed first.
Qualified charitable distributions are available from traditional IRAs, Roth IRAs (with taxable amounts), and inactive SIMPLE or SEP IRAs, but they are not allowed from employer retirement plans such as 401(k)s and 403(b)s. Thus, one might consider rolling funds from an employer plan to an IRA if you want to take advantage of a giving strategy that involves QCDs.
(1) Giving USA 2022: The Annual Report on Philanthropy for the Year 2021
(2) Source Fidelity Charitable. www.FidelityCharitable.org
Wells Fargo Advisors Financial Network is not a legal or tax advisor. Be sure to consult your own tax advisor and investment professional before taking any action that may involve tax consequences.
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