By Sean Gerlin, CFP®, ChFC®, CLU®
With all that has happened in the world over the last two years, now is a great time to use your wealth to benefit people, charities, and causes you are passionate about, leaving a meaningful legacy with your years of hard work. Not only is giving to charity good for the community and good for you as a person, it can also be good for your tax bill. Here are 5 tax-efficient ways to maximize your generosity.
Bunched Charitable Donations
Charitable giving is tax-deductible, but only if you itemize your deductions. When you take the standard deduction, your charitable giving has no effect on your taxes. Because the current 2022 standard deduction is so high ($25,900 for married couples filing jointly), many taxpayers choose the standard deduction over the hassle of itemizing, effectively making a charitable donation meaningless for tax-efficiency purposes.
This is where bunched charitable giving comes in. With this strategy, you “bunch” your planned giving for two years into one tax year. In doing so, you help ensure you give enough in one year so that itemizing makes sense, while opting for the standard deduction in the other years.
Donor-Advised Funds (DAFs)
Donor-advised funds (DAF) are charitable giving programs that allow you to combine the tax benefits of giving with the flexibility to support your favorite charities. This is a great option if you know you want to give to charity but you’re not sure exactly which causes to contribute to.
Contributions to a DAF provide a current year’s tax deduction but are then invested to grow tax-free over time. Ultimately, when and where the funds are donated is up to you, the donor. This may result in more dollars for the organizations you support depending on when you decide to transfer the assets.
You can contribute anything from cash or appreciated securities to real estate or life insurance. Donating cash typically results in an income tax deduction of up to 50% of adjusted gross income (AGI), whereas donating appreciated securities can provide savings on capital gains tax and a deduction of the full fair market value, up to 30% of AGI.
Once the money is donated to the DAF, you no longer have legal control over it. But you are the decision-maker when it comes to how the funds are invested and when they are distributed to the charities you choose. This means you can donate large sums up front but choose a charitable distribution schedule that spans years.
Qualified Charitable Distributions
If you own an IRA, you can use a qualified charitable distribution (QCD) to receive a tax benefit for your charitable giving, even if you take the standard deduction.
A QCD is a distribution made from your IRA account directly to the charity of your choice. It can count toward your required minimum distribution (RMD) for the year and it does not count toward taxable income. As such, you don’t have to pay any taxes on it.
This can be an effective charitable option for those who have large IRA balances that they don’t necessarily need to fund their retirement lifestyles.
Charitable Remainder Trusts
A charitable remainder trust (CRT) provides a current source of income for you or a beneficiary and then passes the remaining value to charities of your choice. It allows you to convert an appreciated asset into lifetime income.
With this trust, the assets are technically donated to charity before they are sold, which provides certain tax benefits, including a charitable deduction. As the grantor, you will receive more income over your lifetime by using a CRT than if you had sold the asset yourself, and you even gain creditor protection for it.
CRTs also provide other important tax benefits and, best of all, they allow you to contribute to charitable causes that are near and dear to your heart. Unlike DAFs, you always have control of the trust. Your trustee manages the assets but they must follow the instructions you have indicated and make changes per your direction.
Gift Appreciated Assets Directly to Charity
Another tax-efficient option is to gift highly appreciated stocks or other assets directly to the charity of your choice. If you have held the stock longer than a year, you can avoid the capital gain tax due on the stock’s rise in value. On top of that, you may be eligible for a charitable deduction depending on the type of charity you donate to and if you choose to itemize your deductions.
By donating this way, not only are you avoiding capital gains and potentially reducing your taxes, but you are also gifting more than if you sold the stocks and gifted the charity cash instead.
What Strategy Will You Use?
If giving charitably is at the top of your list of financial priorities, we can help you make the most of your donations. Choosing a tax-efficient strategy involves assessing your entire financial portfolio to ensure you’re not leaving money on the table that would be better utilized by you or the charity of your choice. Schedule a no-obligation introductory phone call or reach out to me at firstname.lastname@example.org or 407.720.6535 to get started today.
Sean Gerlin is founder, principal, and a financial planner at Envision Wealth Planners, an independent financial advisory firm founded on the core values of family, honesty, and a determination to be a master of the trade. With almost 10 years of experience, Sean specializes in serving affluent families and commercial real estate executives and brokers, providing comprehensive, customized financial guidance and services for their complex financial needs. Sean acts as a family CFO, managing and coordinating the many moving pieces of his clients’ financial lives. Sean is known for his commitment to building long-term relationships and paying personal attention to each client. He is passionate about helping his clients experience the relief that comes from having organized and well-planned strategies and portfolios, and he desires to help them by shouldering some of the financial burdens they face.
Sean has a bachelor’s degree from the University of Florida and holds the CERTIFIED FINANCIAL PLANNER™, Chartered Financial Consultant®, and Chartered Life Underwriter® certifications. When he’s not working, you can find him cooking, eating good food, traveling, coaching his son’s baseball team, or playing golf. He loves spending time with his wife, Nicole, and their two kids, Avery and Will, and entertaining friends in their beautiful backyard. To learn more about Sean, connect with him on LinkedIn.