Make the Most of Giving Tuesday: Tax Saving Donation Strategies
By Heather Hoffman, Marketing and Communications Specialist
We know Scrooge didn’t utilize a charitable remainder unitrust when he was changed by the Ghost of Christmas Future, and the Grinch didn’t open a private foundation when his heart grew three sizes, but they missed out on some major tax benefits! Before making a decision on where or what you want to donate as the year ends, make note of these gifting strategies that could help you optimize your donation.
Qualified Charitable Distributions
If you’re approaching your 70s, you should be familiar with your required minimum distribution (RMD) from an IRA. Instead of withdrawing funds directly, consider utilizing a qualified charitable distribution (QCD). The funds are paid directly from the IRA to the qualified charity or charities; they never reach the hands of the account holder.
- You can choose to take your full RMD through a QCD or split it however you choose. The maximum donation is $100,000, and married couples can separately reach that limit.
- There are multiple tax benefits you could potentially receive from utilizing QCDs. If you itemize your taxes, note that QCDs are not counted toward the maximum accounts deductible. QCDs reduce the total balance in an IRA, which can lower RMDs in the future. Because the account owner doesn’t ever receive the money, it can keep you from reaching the next tax bracket.
- They can be withdrawn from a traditional IRA, inherited IRA, SIMPLE IRAs, and SEP plans. QCDs come with options and flexibility.
Charitable Remainder Unitrust
A Charitable Remainder Unitrust (CRUT) is an irrevocable trust that allows the owner to donate assets into the account for a specified period of time. These assets provide an income stream to a chosen beneficiary. When the term is over, the remaining funds in the account are donated to a charity of the owner’s choice. This remainder must be at or above 10% of the initial net fair market value of all assets placed in the trust.
- When a CRUT is established, you receive an immediate partial tax reduction. This deduction is based on many factors, including the term of the trust, IRS interest rates for the assumed growth, projected income payments, and type of trust. In addition to the initial tax reduction upon establishment, no capital gain taxes are paid when an asset is sold from the trust.
- Between 5-50% of the fair market value of the assets in the account must go to a beneficiary of the account holder annually. Payments can be made monthly, quarterly, semi-annually, and annually. The beneficiary could be the owner of the account, or whoever they choose. This income stream has a maximum time frame of 20 years. If the beneficiary passes, the remaining assets are donated to the chosen charity.
- Assets can be added to the account overtime, unlike a charitable remainder annuity trust (CRAT). These assets could include cash, real estate, publicly-traded securities, and more.
Donor Advised Funds (DAF)
A donor-advised fund (DAF) is an account where you can deposit assets that will be donated to a charity at some point in the future. You, as the owner, make a recommendation on how to invest the assets and what charity you’d like the donation to go to.
- DAFs produce an immediate tax reduction on the assets contributed when the account is formed. Even if the funds take years to fully distribute, you receive the tax benefits the year you contribute. You won’t pay capital gain taxes on the assets you put in the fund, and your estate tax is reduced, if applicable.
- You get the power of choice with a DAF. You can choose what charity the funds go to, when they are donated, the kind of assets you contribute, and which sponsoring organization you want to handle it.
- Unlike some other forms of giving, DAFs allow you to remain anonymous. Maintaining anonymity allows your donations to stay out of public knowledge. It can also prevent future solicitors from having your information. If neither of those matter to you, you can still choose to have your information associated with your donation.
Gift Your Current Assets
Instead of selling appreciated real estate, publicly traded securities, or other non-cash assets for the purpose of donation, you can gift them directly to the charitable institution instead. If you’re planning to sell your publicly traded securities at a loss, you can donate the proceeds to receive a charitable deduction.
- For profitable stock assets, you can usually eliminate the capital gains tax you otherwise would’ve had to pay, for assets that have been held for more than a year. A charitable deduction can be claimed for the fair market value of the assets. By avoiding this tax, you increase the amount of funds that the charity receives.
- For publicly traded securities that are being sold at a loss, you can utilize tax-loss harvesting by using capital losses to offset capital gains.
- If it’s time for an investment portfolio rebalance, incorporating charitable giving could be a beneficial part of your strategy. Rebalancing can come with a heavy tax, so a split gift/sale strategy with donating long-term appreciated assets can offset the capital gains tax from selling appreciated assets. A charitable deduction can then be claimed.
Whatever strategy you decide is right for you, the important factor is having a strategy at all. You can increase your charitable impact while ensuring your personal finances aren’t taking more of a hit than they need to. These are only some of the tax-advantaged gifting strategies that are options for you. Before making any major financial changes, be sure to consult with your financial advisor.
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.