by Landon Buzzerd, CFP®, Associate Wealth Advisor
November 21, 2024
The following are various methods you can implement to maximize your philanthropic efforts in a tax-efficient manner. As your financial picture changes along with your goals, the level of complexity may increase as well. It is essential to partner with an experienced wealth advisory team to develop a long-term solution that focuses on the decades ahead. As an established fiduciary with over three decades of proven experience, GSAM welcomes this conversation with you. Please contact us at advisors@gsaminc.com to learn more.
Qualified Charitable Distributions (QCDs)
For those making charitable contributions, a QCD can be a smart and tax-efficient way to give back. This is a direct transfer of funds from an Individual Retirement Account (IRA) or Inherited IRA to a qualifying 501(c)(3) charity. IRA account holders over the age of 70½ may donate up to $105,000 per year from their IRA directly to a qualifying charity. This allows the account holder to satisfy their Required Minimum Distribution (RMD) amount, partially or completely, without paying income tax on the distribution. For a QCD to count toward your annual RMD, it must be made by 12/31 for the tax year in question. For example, if your 2024 RMD is $50,000 and you would like to make a QCD to satisfy the entire amount, the QCD must occur prior to 12/31/2024.
You may select multiple charities to benefit from your generosity. This method of giving tends to be very simple to implement as well. If an IRA has check writing ability associated with it, the account owner can write a check to the qualifying charity. Alternatively, you can request a check distribution be issued from the IRA and sent directly to the charity.
Gifting Appreciated Securities
If you hold highly appreciated assets in a taxable account (joint/personal brokerage or revocable trust), one of the most tax-efficient ways to donate to charity is by gifting appreciated stock directly to a nonprofit organization. This method can provide significant benefits for you and the organization you’re supporting. When you sell appreciated stock, you typically owe capital gains tax on the profit. However, when you donate the stock directly to a charity, you can avoid paying these capital gains taxes. This means more of your gift goes to the charity rather than to the IRS. The charity will sell the stock (typically tax-free as they are a nonprofit) and use the proceeds to fund their mission.
If you have held the stock for more than one year prior to donating it, you may deduct the full fair market value of the donated stock on your tax return, up to a limit of 30% of your adjusted gross income (AGI) for the year. This can significantly reduce your taxable income, further lowering your tax liability. This is only relevant if you itemize your taxes instead of taking the standard deduction. Additionally, you will want to ensure the charity has the functionality in place to accept stock donations. Many large nonprofits do, but it's worth checking in advance.
Donor Advised Fund (DAF)
A DAF is a popular and tax-efficient way to manage charitable donations. A DAF is a charitable entity that individual investors can create through a financial institution to maximize their charitable giving to qualified 501(c)(3) charities. Think of it as a charitable giving account where you can contribute funds now, receive an immediate tax deduction, and then make grants to your favorite charities over time at your discretion. The donations from the DAF to a charity should be pure in natur, meaning you should not receive any goods or services from the charity in exchange for your donation. This would disqualify the donation as a charitable gift. You may contribute cash, appreciated stock, or other assets to the DAF, however these gifts are irrevocable. Once the donation is made, you will receive an immediate tax deduction for the year of the gift. To maximize the tax-efficiency, it is prudent to donate highly appreciated securities to the DAF to avoid paying capital gains taxes, much like the gifting method above.
Funds in a DAF can be invested and may continue to grow tax-free. This means your donation could potentially grow over time, allowing you to give even more to charity. When you contribute to a DAF, you can deduct the gift on your taxes in the year the donation is made, even if you don't disburse the funds to a charity until later. This allows you to take advantage of current-year tax savings while giving you the flexibility to decide on grants in the future. Charitable contributions from the DAF to various charities can last beyond your lifetime as well, allowing you to leave a charitable legacy. If you prefer, you can make anonymous donations through a DAF, allowing you to support causes without public recognition.
Charitable Trusts
A charitable trust is a legal arrangement and a powerful estate planning tool that allows you to achieve your philanthropic goals, reduce your taxable income, and create a meaningful legacy. Once the trust is created, assets (such as cash, real estate, or investments) are placed into the trust with the intention that they will be used to benefit a charity or charities.
When you establish a charitable trust, you may qualify for an immediate charitable deduction on your income tax return, which can significantly reduce your tax burden. Additionally, if you transfer appreciated assets (like stock) to the trust, you can avoid capital gains taxes. There are two primary types of charitable trusts: Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs).
Charitable Remainder Trust (CRT): You or your beneficiaries receive income from the trust for a specified period (often for your lifetime or a set number of years). After that period, the remaining assets go to the designated charity. This allows you to support a cause while still benefiting from the trust during your lifetime.
Charitable Lead Trust (CLT): The charity receives income from the trust for a specified time, and the remaining assets pass to your heirs. This can be a good strategy for reducing estate taxes while benefiting both charities and family members.
Charitable trusts are suitable for individuals who want to combine philanthropy with long-term financial planning. If you have substantial assets and want to make a significant charitable contribution while receiving income during your lifetime (or providing for your heirs), a charitable trust might be the right choice. Setting up a charitable trust involves legal and financial considerations, so it’s essential to work with an estate planner or financial advisor to ensure that the trust is structured correctly to meet your objectives.
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Disclaimer: This article is for informational purposes only and is not to be construed as tax or legal advice. Please consult your licensed tax professional and/or legal counsel for strategies that may be appropriate for you.
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