Tax-Efficient Giving
Photo by Jon Tyson on Unsplash
Well for my clients, we're going into one of the most wonderful times of the year, Tax Planning season. You could argue it's right up there with opening day for baseball (for me), March Madness (for my wife's family), and of course Christmas (for everyone but Ebenezer Scrooge).
Why is tax planning season so wonderful? Or better yet, what is tax planning season? You're right, let's start there.
Tax planning has to do with the preemptive analysis and steps we take before the end of the year, which could significantly affect how much tax we owe this year and in the years to come. So even though it might be a little bit of work to gather and analyze, who wants to say no to saving money during their lifetime? Not I, said the cat.
Many of my clients have a high regard for giving, whether to family and friends, local charities, or other important causes. This might take the form of time, physical donations, or more likely than not, money. But when it comes to the method of giving money, there can be some significant tax implications for the giver. This is something I like to look at with my clients, because if someone is already wanting to give money, we might as well look at how to maximize that money for the recipient as well as the giver.
A few strategies to consider
I'm going to list a few of the many strategies out there that are worth considering when donating money. I won't go into a ton of detail, but I hope that something sparks your interest. Be sure to ask your CPA or financial advisor about whether any of them might be a good fit for you.
Donor-advised fund (DAF): Think of it as a "charitable holding tank." You donate money to the DAF, get the tax deduction that year, then give it to charities whenever you'd like over the coming years. It can be utilized by itself or alongside other strategies.
Give appreciated investments instead of cash: For those with investments in a taxable account, held longer than a year and with significant unrealized gains, you can donate those investments directly to a charity (or a DAF) and deduct their fair market value. The charity can then sell them without having to pay capital gains tax. A fairly nice win/win for both parties.
"Bunch" your giving for a bigger (tax) impact: With the expanded standard deduction, often people can't "itemize" their deductions, which means that there may not be any tax benefit to charitable giving. To help with this, you could consider "bunching" more than one year's giving into a single year, so as to benefit from itemized deductions, with the intent (if you use a DAF) to then spread the giving out over a few years. This can be a particularly smart move during years that are high-income (business sale, large bonus, etc.) where a tax deduction would be helpful.
Give directly from your IRA: For individuals over 70 1/2, you can utilize what is called a Qualified Charitable Distribution (QCD). This is when you give directly from your IRA to a qualified charity, while avoiding counting it as taxable income. Additionally, for those 73 and older, using a QCD can also help meet the Required Minimum Distribution requirements, helping reduce taxes in other areas.
More complex options like CRATs, CRUTs, CLTs, and CGAs: If you want to give a larger amount of money, while retaining some interest in the money prior to it all being given away, you can consider structures like Charitable Remainder Annuity Trusts, Charitable Remainder Unitrusts, Charitable Lead Trusts, or Charitable Gift Annuities. Each of these word sandwiches has different nuances, but they all allow you to separate out the income stream of the gift from the principal of the gift. For example, you can receive income from the gift for the rest of your life, and then the remainder is kept by the charity when you pass away. These can be quite complex, so you would want to work with an estate planning attorney, CPA, and financial advisor to put them into place.
A few ways these strategies can be impactful
Here are a few ideas:
Support a cause you care about at a higher dollar amount than if you just wrote a check.
Reduce or eliminate a concentrated stock position without triggering a big tax bill.
Reduce your IRA balance in retirement while benefiting a charity instead of the IRS, while potentially helping yourself save on taxes and Medicare premiums.
Receive some tax benefits when you otherwise wouldn't.
I hope that these ideas give you insight into some of the ways to not only make a big impact on causes you care about, but also a big impact on your tax savings. And it's not to simply try to avoid taxes. We should absolutely do our part as citizens and pay the taxes we owe. But as someone once said, there's no reason we need to also leave the IRS a tip.