Year End Giving
Charitable Giving & Reducing Tax Liability (Win-Win)
Charitable giving is win-win, benefiting both those in need and the generous individuals who give. There are opportunities for charitable giving to not only amplify the job of giving but also reduce one’s tax liability. If lightening your tax burden while making a meaningful impact on a charity or cause that is important to you, then you’ll want to keep reading…
Gifting to charities benefits the causes you care about and can be done in a manner where Uncle Sam covers part of the donation and/or may provide you with an opportunity to make a larger donation. There are ways to make your charitable donations to reduce your tax liability even if you currently take the standard deduction.
Qualified Charitable Donations
The current IRS rules allow for anyone 70.5 and older to make Qualified Charitable Donations (QCD), up to $100,000/year, directly from your IRA to qualified charities. Normally, traditional (non-Roth) IRA distributions are taxed as ordinary income, but a QCD avoids taxation if you follow the rules. The primary rule requires that the distribution go directly from your traditional IRA custodian to the charity. If you take cash out of your traditional IRA and then give it to the charity, it will not count as a QCD, and the distribution will be taxable income. You could include the donation when itemizing, but not everyone itemizes and the direct QCD route reduces your Adjusted Gross Income which is more valuable than a “below the line” deduction. The QCD can be very powerful for those with a Required Minimum Distribution (RMD) that exceeds what you need or want to withdraw in that year. You can meet your RMD by any combination of personal distributions and Qualified Charitable Distributions. While the IRS permits up to $100,000 in QCDs per year there is no “roll-over” – any amount above your RMD for the current year will not count toward your RMD in future years.
Donor Advised Funds
Another option for charitable giving is to contribute to a Donor Advised Fund. This strategy allows for a current year deduction without having to decide which charities to support. There are no age restrictions on contributing to a donor advised fund. Since the donation is a “below the line” deduction (after your adjusted gross income is determined on the tax return) to benefit you will need to itemize your deductions (exceed the standard deduction). If you have the funds available, it is often more tax efficient to lump your planned giving into one year. Lumping multiple years of donations may assist in exceeding the standard deduction and/or offset a high-income tax year. If contributing cash to a donor advised fund you can deduct the amount of donation up to 50% of your AGI.
Highly Appreciated Assets
For many, especially high-income earners, donating highly appreciated securities to a charity or donor advised fund is much wiser than donating cash, since it includes a double benefit. You avoid paying the taxable capital gains when selling the security, and you get to deduct (if you itemize) the fair market value of the security when donated (if the security has been held for at least 1 year). You can deduct up to 30% of your AGI in a single year for donating appreciated securities.
Important Note
It is important to note there are many rules related to each of these strategies and this information is provided for educational purposes only. The IRS has multiple rules that must be followed, or you may compromise the eligibility of the tax deduction. You should always consult with a tax expert regarding your specific situation and circumstances prior to making any charitable contribution.
