Investors practice charitable giving for many reasons: It can help you feel good to give back to a cause or organization that you support, it sets a positive example for the younger generations around you, and it’s a way to make an impact. But one additional benefit of donating is that it can help investors save on their taxes. If you’ve never considered the charitable planning piece as part of your overall wealth management strategy, it might be a good idea to discuss it with your financial advisor. Here are a few options available to you.
Qualified Charitable Deductions
While the SECURE Act of 2020 raised the age of Required Minimum Distributions (RMD) from 70.5 to 72, the IRA allows for taxpayers or IRA owners to participate in Qualified Charitable Deductions (QCD) at age 70.5. What this means is that you can take your pre-tax IRA or 401k contributions and gift it directly to a charity up to $100,000. Since the funds are given directly to the charity, it does not need to be reported as income on your tax return and you’re not taking a deduction. This is, essentially, a full write-off.
This is beneficial for those who take the standard deduction, or who don’t have many itemized deductions. Being charitable in this way will reduce the overall value of your IRA accounts over time and they will reduce the RMDs in the future as well.
If you’re taking the standard deduction and gifting to charity every year, a donor-advised fund (DAF) might be your preferred way to donate. A DAF is an investment vehicle that you can contribute to which allows you to donate to one or multiple charities.
For example, a couple who is married filing jointly over the age of 65 has a standard deduction of $28,700 in 2022. If they donate $15,000 to their charity or religious organization every year, they do not get any additional write off beyond the maximum $600 charitable deduction. With a DAF, you can contribute a lump sum. Instead of giving $15,000 per year, you can contribute 5 years’ worth of donations into the DAF (for this example, that would be $75,000). Doing so allows you to itemize your deductions – resulting in an additional deduction of $45,700 – which otherwise would not be possible. This does not mean that the lump sum is given to the charity all at once; rather, it is distributed over that period of 5 years.
Taking the itemized deduction due to the DAF may also allow you to take other deductions; please discuss this option with your financial advisor and tax professional.
Donor-advised fund with a Roth IRA conversion
Taxpayers may also be able to benefit from a donor-advised fund when they are considering converting an IRA to a Roth. Typically when a Roth IRA conversion occurs, that money is considered taxable income. But if you were able to complete the Roth IRA conversion at the same time that you also contributed to a DAF, you might be able to offset that tax burden.
Gifting appreciated stock to a donor-advised fund
If you have appreciated stock and are looking to sell, normally you would have to pay a capital gains tax. When the capital gains are instead contributed to a DAF, you do not have to pay that tax. Plus, you can still claim the deduction for the full market value of the stock.
How charitable donations can be implemented into your financial strategy
If you have questions about how to implement charitable planning into your current financial strategy, we’d love to help. Discuss and plan possible options with your financial advisor as well as your tax professional.
Contact us today to help you decide whether charitable giving is the right move for your financial wellbeing.
The Team at Chatterton & Associates
Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc nor its representatives provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.