Charitable Giving Strategies: Options to Consider
Due to the COVID-19 pandemic, many organizations vital to the community have been hit hard; some struggling to survive. They are looking for financial support now more than ever. In response, many people are opening their wallets to donate to charitable organizations and non-profits.
When donating to a charity or non-profit that is a registered 501(c)(3), there are valuable tax deductions that individuals can claim to help maximize their gift to an organization. However, the Tax Cuts and Jobs Act passed at the end of 2017 made significant changes to tax laws that could impact the deductibility of donations for some taxpayers. Therefore, it is important to understand these changes when evaluating your options for charitable giving based on your tax situation.
Aside from giving cash or writing a check, there are many other options available when making a charitable donation.
Qualified Charitable Distributions (QCD) - A QCD is a direct transfer of funds from your Individual Retirement Account (IRA) payable to a qualified charity. QCDs can be used to help satisfy your required minimum distributions (RMDs) for the year, as long as certain rules are met. QCDs do not require you to itemize your deductions to benefit from the donation. Instead, QCDs are excluded from your taxable income, unlike regular withdrawals from an IRA. This helps to lower your taxable income and may reduce the impact to certain valuable tax credits and deductions, including Social Security and Medicare.
Combining multi-year planned donations into one year – Since tax law changes in 2017, some taxpayers may no longer qualify for the level of deductions necessary to surpass the standard deduction threshold needed in order to itemize and claim their donations. However, you may be able to benefit by combining multiple years’ worth of charitable giving in one tax year to surpass the itemization threshold.
Long-term appreciated investment assets – Donating highly appreciated investment securities is an effective and tax-efficient way to provide financial support to non-profits and charities. Generally, if your assets have appreciated in value, it is best not to sell securities to generate cash needed for a donation. When you donate long-term appreciated assets like bonds, stocks or real estate directly to a 501(c)(3), you do not have to pay capital gains taxes and can claim an income tax deduction for the full fair-market value when you itemize, up to 30 percent of your adjusted gross income. Gifting securities directly to the organization increases the amount of your gift as well as your deduction.
Estate Planning - By naming a qualified 501(c)(3) in your will or as a beneficiary of a qualified insurance policy, retirement plan or trust, you reduce or possibly even eliminate the burden of estate taxes for your heirs. Your bequest continues to support the organizations you love and your legacy lives on. As part of this strategy, you are able to stipulate what the donation can be used for or give to a specific function withing the organization.
A few advanced gifting strategies:
Donor-advised fund (DAF) - A donor-advised fund is a dedicated account for charitable giving. When you contribute cash or appreciated securities to a DAF you are eligible for an immediate tax deduction. You can then recommend grants over time to any IRS-qualified public charity and invest the funds for tax-free growth. Donor-advised funds provide many benefits for organizing and planning giving, but they also offer advantages in terms of income, capital gains and estate taxes. A DAF can also be an effective strategy to allow future generations of your family to develop philanthropic interests.
If you want to make a donation and receive a fixed source of income in return, consider a charitable gift annuity. An annuity is a contract that guarantees payments for a specific number of years. Here’s the charitable twist: you can enter into an agreement to make a lump-sum gift to a favorite charity in exchange for the right to receive fixed payments. The size of the payment is determined by a number of factors, including your age. The amount you’re entitled to receive doesn’t change, even if the investment dips on the charitable side. After the term of years—or if you die before the term expires—the charity gets to keep the cash.
Charitable Gift Annuity – By entering into a Charitable Gift Annuity, a taxpayer makes a contribution of cash or appreciated assets and receives a fixed source of income in return. An annuity is a contract that guarantees payments for a specific number of years and the size of the annuity payment is determined by several factors, including your age. The amount of income you are entitled to receive does not change, even if the contract value fluctuates. After a predetermined number of years, the designated charity or non-profit gets to keep the rest and you are entitled to a federal income tax deduction for the value of the balance.
While these strategies present a variety of options for charitable giving, it is important to consult your tax and estate planning advisors for specific recommendations that will impact your individual situation.
Sarah Mouser, CFP®, CTS™, CES™, CCFS®, ELA™ is the Director of Financial Planning at Cassaday & Company, Inc., an independent wealth management firm in Tysons Corner. As a regular Forbes.com and Advisor Perspectives contributor, Sarah is able to share insight on planning topics most important to today’s investors.
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