Three simple charitable donation strategies to consider this Giving Tuesday (or before the end of the year)
What better day than Giving Tuesday to re-run our charitable gifting blog from December 2018? Continue reading below to see three simple ways you can enhance your charitable giving today! What’s more, these techniques can also be used any time before the end of the year to take advantage of the tax benefits of charitable giving!
1. Send your RMD directly to charity
The IRS requires you to take Required Minimum Distributions (‘RMDs’) from traditional IRAs, SEP IRAs, SIMPLE IRAs, and some 401(k)s once you reach age 70½. These distributions are included in your income and taxed at the same rate as earned income (i.e. salary/wages, not the lower capital gains rates).
If you haven’t yet taken this year’s RMD and don’t need the cash, consider sending it directly to charity instead. This is called a “Qualified Charitable Distribution” (‘QCD’), and the main benefit is that the RMD isn’t included in your taxable income.
Some important caveats:
- The RMD check must be made payable directly to the charity (not to you personally!)
- You cannot claim a QCD as an itemized deduction (unlike “normal” charitable donations that you make from a checking/savings/brokerage account, etc.)
- The organization must be a 501(c)(3) entity
- The amount is capped at $100,000 per year
2. “Bunch” regular, recurring donations into one single check
Each year taxpayers have the option to offset a portion of their income by subtracting either a “standard” deduction or “itemized” deductions. The standard deduction is the default amount taxpayers can deduct, depending on marital status. For 2019 that amount is $12,200 for singles and $24,400 for married couples who file jointly.
Itemized deductions, on the other hand, allow taxpayers to aggregate specific expenses such as mortgage interest, state & local taxes, charitable donations, and medical bills. Naturally, you would itemize expenses only if they add up to more than $12,200 (for singles) or $24,400 (for married couples).
Because the 2017 tax law doubled the standard deduction, fewer taxpayers are expected to itemize. This means that if you were someone who typically itemizes, it is now more important than ever to strategize on how to get over the new “standard deduction hump”!
One possible solution? Use a “bunching” strategy to combine several years’ worth of charitable donations into just one combined gift, and skip donations in subsequent years. By writing one large check – as opposed to an annual series of smaller donations – you increase the likelihood your total itemized expenses will be greater than the standard deduction that year.
John and Jane have the following itemized expenses in 2019:
- $10,000 in Virginia state income and property tax (max allowed)
- $8,000 in mortgage interest
- $4,000 to their local food bank (a donation they make each year)
Since their standard deduction is $24,400 they would not itemize expenses this year ($22,000 < $24,400). However, if they were committed to giving the food bank $4,000 every year (and have enough cash on hand) they could instead “bunch” several years’ worth of these donations into one large gift to push their total itemized expenses over the hump and get the tax benefit. For example, if they gave the food bank a check for $16,000 (four years’ worth), this would bring total itemized expenses to $34,000 – $9,600 more than the standard deduction. Assuming they are in the 24% tax bracket, this could save up to $2,304 in taxes ($9,600 x 24%)!
3. Donor Advised Funds
A Donor Advised Fund (‘DAF’) is a spiffy name for what is essentially a charitable savings account. They operate similar to a typical bank or brokerage account, except with DAFs the money is used to benefit charity instead of you personally.
Opening a Donor Advised Fund account is fast and easy! It can be done online or through a financial advisor (like us!). After the account is opened the first step is to add money to it, which can be done in cash, stocks, bonds, mutual funds, ETFs, or even real estate and private business interests. When you put money in the account you receive an upfront charitable deduction, similar to if you just wrote a check to your favorite charity (subject to limits – see below).
As mentioned above, monies inside DAFs are meant to be distributed to charities. However, there is no actual timetable as to when those disbursements must be made. The benefit of DAFs, therefore, is that account owners can invest monies inside the DAF account and then at their convenience decide which charitable organizations to benefit (and for how much). Interest, dividends, and capital gains within Donor Advised Funds are not taxable, allowing charities to further benefit from the power of compound interest.
- Upfront tax deduction (up to IRS limits) in the year you make deposits into the account. The deduction depends on what type of property you contribute (i.e. cash versus stocks, bonds, etc.) so consult your tax professional for more information.
- Supercharge charitable giving by combining with other strategies. When combined with the “bunching” strategy above, you can “supercharge” a Donor Advised Fund with multiple years’ worth of gifts, get the upfront tax deduction, and still send money to your favorite charity each year.
- Gives you time to figure out which organizations you’d like to support. It is very common for people to have a desire to support charity, but not know which organizations to support yet. A Donor Advised Fund gives you time to figure out which organizations to support, while at the same time collecting an upfront tax benefit.
- Leave a legacy and streamline your estate plan. DAF assets are not included in your estate (or probate) when you die, meaning they can be a way to lower estate taxes. What’s more, the DAF doesn’t have to disappear when you die: spouses and/or children can be named as successor owners, so heirs can step up and continue your philanthropic legacy. If you have no heirs or are not comfortable leaving the DAF in their care, you can opt to have the account liquidate at your death and designate a favorite charity(ies) to receive a lump sum gift.
- Contributions are irrevocable. Once you put money in, you cannot get it back.
- Your financial institution does not have to listen to you. The financial institution you open your account with acts as trustee over the funds. That means they technically are not legally obligated to follow your instructions when you’d request charitable donations be made. In practice, so long as the entity in question is a legitimate 501(c)(3) organization, your requests will rarely, if ever, be denied unless there is good cause. Before you open a DAF, be sure to check the sponsoring institution’s list of pre-approved organizations to see if your preferred charities are listed.
Consider the strategies discussed above as ways to maximize your charitable donations this Giving Tuesday. Of course, these strategies may not be appropriate for everyone so please be sure to seek guidance from your tax or financial advisor to discuss your specific situation and goals. At the end of the day, what’s most important is giving back to those organizations which selflessly strive to make our world a better place!
Give us a call or leave your information on our website if you’d like to learn more about these gifting strategies (and more!).
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Certain hypothetical case studies have been presented to highlight how the gifting strategies may be employed. Nonetheless, these are only hypothetical illustrations and do not represent actual results achieved by Taylor Hoffman. Actual results will vary depending on a variety of circumstances.
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