America holds the designation as the most charitable nation in the world. In 2020 alone, U.S. charitable giving totaled $471 billion. Interestingly, 69% of that giving came from individuals.
If you’re reading this article, you’re likely in the habit of giving back – and you probably make your philanthropic decisions based on your values and passions. For most philanthropists, it’s about much more than money. However, even though tax planning probably isn’t your main reason for giving back, don’t overlook the valuable tax benefits you’re entitled to. Here are some tax-savvy charitable giving strategies you can implement.
Current Tax Law
The Tax Cuts and Jobs Act (TCJA) of 2017 strengthened some of the tax benefits related to charitable giving. If you’re practicing philanthropy – that is, making donations of cash or property to charitable organizations – ensure you’re taking the necessary steps to qualify for current tax advantages associated with your giving:
- Make sure your gifts are going to qualified charitable organizations.
- Itemize deductions on your income tax return.
- Meet gift documentation/substantiation requirements.
Prior to the TCJA, you could deduct up to 50% of your adjusted gross income as charitable gifts. Now, however, you can gift up to 60% of your income while still benefitting from the tax deduction.
You’re probably aware that the TCJA also doubled the standard deduction, so fewer taxpayers are itemizing. However, the CARES Act provided a $300 charitable tax deduction for both 2020 and 2021 tax years. For 2021, married couples who file jointly can deduct up to $600.
What if You Want to Donate More?
Maybe you have the desire and the resources to give far more than $300 or $600 to your favorite charitable causes. If so, there are two strategies you should consider.
Strategy #1: Utilizing a Donor Advised Fund to ‘Bunch’ Contributions
Here’s how this option works: Let’s assume you usually give $10,000 per year to one or more qualified non-profit organizations, but you stopped itemizing your deductions due to the increased standard deduction. If you’re committed to continuing your philanthropy each year and you don’t want to miss out on the tax benefits associated with your charitable giving, you might consider a strategy called “bunching.” This is when you put several years’ worth of giving into a single year and place the gift into a donor advised fund (DAF). For instance, you could make a single gift of $30,000 to cover the next three years.
Here’s how it works, in specific, and why it’s a tax-smart option, too. DAFs are separate charitable investment accounts. You can set one up quite simply through a qualified custodian, and you can fund them with various assets like cash, stocks, and bonds. Once you have established your account, you can select a strategy for how any of your gifted – but not yet granted – dollars will be invested in the future. Then, you get the opportunity to recommend grants of funds to any qualified charitable organizations you wish to support. Note that such contributions to a DAF are irrevocable, meaning you get an immediate tax deduction in the year you make the contribution – no matter how long you take to distribute the funds. Returning to the example above, you could make a contribution of $30,000 to your DAF now, enjoy the itemized tax deduction this year, but spread the grants out over three years so that you’re still contributing about $10,000 to your chosen charities annually. In this scenario, you would take the standard deduction in years two and three.
In short, this is a strategy that allows you to front-load your charitable giving in such a way as to enjoy multiple years of tax deductions in a single year – and the impact to your chosen non-profits remains the same as before.
Strategy #2: Gifting Your Required Minimum Distributions
Current law requires you to start taking Required Minimum Distributions (RMDs) from your retirement accounts starting at age 72 – whether or not you need the income for your daily living expenses. You must pay income tax on these distributions, with one exception. The IRS permits distributions from an IRA as tax-free gifts to 501(c)(3) charities as long as you are at least age 70.5. So, if you know you won’t need all or a portion of your annual RMD, you can choose to use it as a significant gift to a qualified charity instead. In fact, you can gift up to $100,000 per taxpayer per year in this manner.
This strategy is called a Qualified Charitable Distribution (QCD). It’s an incredibly savvy tool because it allows you to accomplish four goals at once:
- You can satisfy your RMD requirement
- Avoid paying taxes on said RMD
- Support a cause or organization that is meaningful to you
- Avoid the risk of your RMD pushing you into a higher tax bracket or causing increased Medicare premiums or a phaseout of other tax deductions
A QCD is truly beneficial for both your finances and for the charities you support.
Are You Considering a Tax Strategy When You Practice Philanthropy?
Charitable giving is a meaningful way to change lives and invest in your hope for the future. Even if your motivations are completely unrelated to your finances, it’s smart to optimize your giving strategy. You can reap the benefits in the present, while also ensuring you’ll have more resources to give in the future, too.
At Wade Financial Advisory, our clients include successful entrepreneurs, professionals, and executives, and many of them practice philanthropy. If you’d like professional support in optimizing your charitable giving, or any other aspects of your financial plan, please reach out to us today. We currently serve clients working for companies such as Tesla, Facebook, Nvidia, Applied Materials, Apple, Microsoft Corporation, Google, Intel, Cisco Systems, Hewlett Packard, Pure Storage, Zoom Video Communications, Amazon, Adobe Inc., Palo Alto Networks and many others. We would be pleased to serve you and your family, too!