Many of our clients have a desire to share their resources by supporting charitable organizations or faith-based organizations. There are several ways to make your charitable contributions even more tax-efficient.
It’s important to remember that charitable giving should always be primarily motivated by the desire to support an organization. While tax savings are a welcome benefit, they are not the reason to give. If you donate a dollar to charity, you typically won’t save more than $.50 in taxes. Giving money away is giving money away, and tax savings can only partially offset that. However, if you’re interested in supporting charitable organizations, you can be tax-smart about how you do it.
While there are more elaborate strategies suited for very high-net-worth families concerned with estate taxes, there are also some simple strategies applicable to almost every family. For clients who make regular charitable gifts or are planning larger contributions, we can help you execute these in the most tax-efficient manner possible.
Donate Appreciated Shares Directly to Charity
One straightforward practice available to anyone with a taxable investment account holding appreciated assets is to donate those shares directly to a charity. Most national, and even many local charities and churches, are equipped to receive donations of shares.
This strategy allows you to transfer high-value shares without realizing a capital gain. You can then use the cash you would have otherwise used for the donation to re-purchase the shares in your investment account at a higher basis. This process is surprisingly simple, requiring just a form and an electronic authorization. Consistently doing this will help maintain a higher basis in your taxable account and reduce future capital gains.
Utilize a Donor-Advised Fund
Another strategy that has gained significant popularity, especially with the increase in the standard deduction, is using a donor-advised fund. These funds enable you to make a substantial donation in one year, large enough to justify itemizing your deductions, and then distribute those funds to your chosen charities over time.
For instance, instead of giving $10,000 annually to your church or another charity and not itemizing deductions, you could contribute $30,000 to a donor-advised fund every three years. This allows you to take a large itemized deduction in the year of the contribution, and then use the fund to make your annual gifts to the charity while using the standard deduction in the other years.
We partner with organizations like American Endowment Foundation to help our clients set up these funds, and we manage the fund accounts at Schwab, just like all our other accounts. You can contribute cash or appreciated shares to your donor-advised fund, and your fund can even be invested for growth after your initial gift. While there are a couple of extra steps when making your charitable grants—such as logging into a portal to enter our request—the potential tax advantages often make it well worth the slight inconvenience.
Donor-advised funds are particularly well-suited for high-income years. If you are selling a business, receiving a large deferred compensation payout, or experiencing another unusually high-income event, consider using some of those funds to establish a donor-advised fund. This allows the money to grow until you’re ready to make gifts or distribute it over time.
These funds can also be set up for a long-term legacy. You could contribute stock or cash, invest it, and then only give away the earnings each year. When establishing the fund, you’ll designate what happens to the balance if something happens to you, such as naming a successor advisor or specifying a charity or charities to receive the remaining funds after your death.
Make a Qualified Charitable Distribution from an IRA
A third tax-efficient giving strategy is making a Qualified Charitable Distribution (QCD) from an IRA. This strategy is open to anyone with an IRA who has reached age 70.5. QCDs allow you to make a gift directly from an IRA to a charitable organization. This gets the funds out of your IRA while also not realizing income from the distribution. This is another great strategy for those who don’t itemize their deductions. It is also easy to do with a form and an electronic authorization.
Donating shares directly to a charity, setting up a donor-advised fund, and making Qualified Charitable Distributions are three relatively easy strategies to employ and can benefit many families. You don’t need to be ultra-high-net-worth to realize tax benefits from making your charitable gifts in these tax-efficient ways.
Together Planning is a registered investment advisor. The information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Together Planning has a reasonable belief that this marketing does not include any false or material misleading information statements or omissions of facts regarding services, investments, or client experiences. Together Planning has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.