Maximize the effectiveness of your donations with these tax-smart giving strategies. Here are some ways to donate that are better than cash.
1. Donate Appreciated Stock
Donating appreciated stock is a tax-savvy move. Here’s why: If the stock you’re giving away has gone up in value for over a year, you can avoid the 20% capital gains tax. This means your donation is worth 20% higher compared to selling the stock and handing over the cash to the charity. Plus, you can lower your own tax bill by deducting the stock’s current value when making the donation. The charity can then sell the stock and use the money to support its mission. It’s a win-win for both you and the cause you’re passionate about.
2. “Bunching” Charitable Contributions
The Tax Cuts and Jobs Act of 2017 significantly raised the standard deduction, which made it less likely for individuals to itemize their taxes. The standard deduction for 2023 is $13,850 for individuals and $27,700 for married couples filing jointly. But there is a strategy to work around this. You can “bunch” two or three years of contributions into one. By bunching your contribution, you might be able to itemize your deductions and save more on taxes.
3. Donor-Advised Funds
Use donor-advised funds (DAF) to take advantage of both these tax strategies. Here’s how it works: by combining the bunching technique with a DAF, you gain the flexibility to support charities whenever you choose, all while maximizing your tax benefits in the present year. DAFs can also accept a wide range of appreciated assets, unlocking their charitable value while reducing capital gains. Any remaining funds in your DAF account can grow tax free potentially increasing the funds available for donation.
4. Qualified Charitable Distribution (QCD)
Individuals aged 73 and older are required by the IRS to take required minimum distributions (RMDs) from their IRAs. Failure to do so can result in severe penalties. A tax-smart strategy is to use a qualified charitable distribution (QCD). This allows you to donate up to $100,000 each year ($200,000 for married couples filing jointly) directly from your IRA to a charity to satisfy all or part of your RMD.
5. Charitable Trust
There are two kinds of trusts you can create: a charitable remainder trust (CRT) and a charitable lead trust (CLT). Both trusts are irrevocable, meaning they cannot be changed or canceled once they are created.
A charitable remainder trust (CRT) pays income to non charitable beneficiaries for a specified period of time and then donates the remainder to charity.
A charitable lead trust (CLT) often works in the reverse order, with the charities receiving the donation upfront. The trust then makes payments to the charity over a specified period of time. After this period is over, the remaining balance goes to non-charitable beneficiaries.
Everyone’s situation is unique, it’s important to contact your tax and financial professional to determine the best option for your charitable giving. As we approach the end of the year, it is a good idea to start planning now – not only for the benefit of your favorite charities but also to potentially reduce your tax liability.
Disclaimer / Sources:
Donor Advised Funds info
Charitable Remainder Trusts information from IRS.gov.
Important charitable giving reminders for taxpayers from IRS.gov.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice.