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3 Ways to Incorporate Tax-Efficient Charitable Giving Strategies Into Your Financial Plan Thumbnail

3 Ways to Incorporate Tax-Efficient Charitable Giving Strategies Into Your Financial Plan

David Leone

“We make a living by what we get. We make a life by what we give.” - Winston Churchill

This famous quote encapsulates the power of giving and the feeling it gives us by helping others. 

For most people, it’s within our nature to give freely and help others, especially when someone else is in need. 

But what many people don’t realize, however, is how much their charitable giving endeavors can benefit both the recipient and the donor. Utilizing a charitable giving strategy can help individuals access additional financial benefits (namely tax-saving opportunities), as well as provide meaningful and ongoing financial support to their charity or organization of choice.

Here are three strategies for optimizing your gifts now and in the future:

Donor-Advised Funds (DAFs)

A donor-advised fund can be an effective tool for maximizing charitable giving tax deductions while controlling who receives how much and when.

A DAF is an account specifically designed for donating to public charities and other qualifying organizations. It’s owned by a 501(c)(3) sponsoring organization, which manages the account and makes distributions on your behalf. 

Here’s how it works:

  1. After establishing a DAF, you can make charitable contributions (include cash, stocks, property, etc.) to the account. 
  2. You may allow the funds to grow in the account for as long as you like, while contributing as much and as often as it suits you.
  3. The sponsoring organization will make distributions to the charities you recommend.

A DAF is an effective tool for pooling charitable donations together, letting them grow tax-free, and distributing them to multiple nonprofit organizations over time.

In terms of tax savings, contributing to a DAF in a higher income year enables the donor to “lump” together multiple years’ worth of contributions. As a result, they can enjoy an immediate tax deduction while maintaining the ability to grant to charities over time.

If you’d like to establish a legacy of gift giving, you can also use a DAF to set up a foundation for your family and continue charitable giving for future years.

Qualified Charitable Distributions (QCDs)

Depending on the rest of your financial situation, required minimum distributions (RMDs) could be more of a hassle than a help. Because these distributions are taxed, you may want to find a way to reduce the impact they’ll have on your total tax liability (especially if they push you into a higher tax bracket).

The good news is, the IRS allows those who are 71 ½ or older to make Qualified Charitable Distributions (QCDs). These tax-advantaged donations are made directly from your traditional IRA to a qualified charity. Once you turn age 73, you can use QCDs to satisfy all or a portion of your RMDs—up to $105,000 per year.1  

Gifting Appreciated Stock

Did you know that most large charitable organizations accept stock donations? 

In fact, donating appreciated stock directly to your charity of choice benefits both you (the donor) and the receiving organization (the donee).

First, donated stock has the potential to continue growing over time—making it more valuable than cash. And second, you can avoid paying capital gains tax on the appreciated amount.

Here’s why those benefits are significant: 

If you were to sell appreciated stock and then donate the cash value to charity, you’ll have to pay up to 20% long-term capital gains tax (or your ordinary tax rate if you’ve had the security for under a year) on the appreciated market value. Doing so may reduce the amount you’re able to donate, meaning your charity of choice receives less.

In addition to making a direct donation to charity, you can contribute stocks and other assets to your DAF. This is especially helpful if your desired donee is unable to accept stocks outright.

Need Help Optimizing Your Charitable Giving Strategy?

Not only do these three strategies help reduce your tax bill, but they can offer additional advantages to your favorite charitable organization. A thoughtful, tax-focused charitable giving strategy can provide necessary building blocks within your entire holistic financial plan.

Our team at Halpern is more than happy to talk you through these strategies and how they can be implemented to support your specific situation both now and in the future.

Sources:
1. Distributions from Individual Retirement Arrangements (IRAs)

David Leone

Wealth Advisor


240-268-1000