Maximize Your Charitable Impact: Tax Strategies for Charitable Giving
By: Garrett Wells, CFP®
Americans tend to be generous when it comes to helping out their fellow citizens. In 2020, Americans gave a record $471 billion to charities, according to Giving USA, up five percent from the previous year.
More than 80% of charitable donations come from individuals as opposed to corporations. Affluent families gave an average of more than $29,000 in 2020, compared to average charitable donations of about $2,500 in 2020 among the rest of the population.
How Can Charitable Giving Lead to Tax Advantages?
There are many reasons why people contribute to charity: because they find it fulfilling, they have a personal connection to a cause, they like to see their gifts making an impact, or they want to be a part of something bigger than themselves. People also give in order to build a legacy and establish philanthropic family values.
Realizing tax benefits can be a significant incentive for individuals to donate along with the reasons mentioned above.
Contributions of cash, property, or marketable securities that you make to qualified charitable organizations may be tax-deductible if they meet certain conditions. A wide range of charities qualify, including most religious, educational, scientific, and literary organizations as well as charities like the Salvation Army, United Way, and Samaritans Purse.
Deductions for cash contributions are limited to 60% of your adjusted gross income (AGI) in 2023. To deduct your charitable gifts, you must itemize deductions on your federal income tax return using Schedule A. This means that you can’t deduct charitable contributions if you claim the standard deduction. Charitable donations are deductible during the calendar year in which they’re made.
Giving and Tax Strategies to Consider
Charitable giving may be an integral part of an overall wealth management plan. Devising a comprehensive charitable giving strategy can benefit both the charities you wish to support and your personal finances. Affluent families in particular can often realize significant financial, tax, and estate planning benefits via charitable giving.
Following are five charitable giving tax strategies that can maximize the impact of giving on the charities you want to support as well as your personal finances:
1. Establish a Donor Advised Fund (DAF)
A Donor Advised Fund is a pool of assets managed by a charitable organization. You can invest the assets in hopes of growing them over time to help you make an even bigger charitable impact.
These donations are tax-deductible during the year when they are made. One of the biggest benefits of establishing a DAF is that you can donate assets and claim a tax deduction now and decide later which specific charity will receive the gift. Family members and friends can pool their resources and give to a DAF together if they like, which makes them a great option for establishing an enduring family legacy of philanthropy.
2. Donate Long-Term Appreciated Assets
Here, you would donate assets that have appreciated in value instead of donating cash to a charity. The charity will receive the full current value of the asset and you won’t have to pay capital gains tax on the appreciation.
Real estate, common stock, and other securities can be donated in this fashion. In addition, you can deduct more than what you originally paid for the asset, and you won’t have to touch your liquid funds to make the donation.
3. Bunch Charitable Donations
The strategy here is to combine several years’ worth of charitable donations into one year to maximize that year’s deductible contributions. Keep in mind that your total annual charitable contributions must exceed the amount of the standard deduction for you to benefit from the charitable donation deduction.
For the 2023 tax year, the standard deduction for married couples filing jointly is $27,700. For single filers and married couples filing separately, the standard deduction is $13,850, and for heads of household, it is $19,400. Bunching charitable donations is an efficient way to donate, especially in years when one’s income is higher than normal. This strategy can also be done in conjunction with a Donor Advised Fund.
4. Use Charitable Remainder Trusts (CRTs)
Charitable Remainder Trusts are an especially useful charitable giving vehicle. They provide an income stream while passing the remaining value to charities when the trustee or beneficiary dies. There are two main types of CRTs:
- Charitable remainder annuity trusts (CRATs) distribute a fixed annuity amount each year. No additional trust contributions are allowed.
- Charitable remainder unitrusts (CRUTs) distribute a fixed percentage that’s based on the balance of trust assets each year. No additional trust contributions are allowed.
Contributions to both CRATs and CRUTs are irrevocable. Both must distribute income or principal to either the donor or a beneficiary. At the end of the trust’s term, the remaining trust assets are distributed to one or more charitable beneficiaries.
5. Make a Qualified Charitable Distribution (QCD)
With this strategy, qualifying individuals can donate assets held in an IRA to charity instead of giving away liquid assets. QCDs are especially helpful if you must take required minimum distributions (RMDs) from your traditional IRA even if you don’t need the money since taxes aren’t assessed on the donation.
You can donate up to $100,000 annually to charity via a QCD. Keep in mind that distributions must be made directly from the IRA to the charity or charities. If they are made to you and you donate the money to the charity, you will forfeit the tax benefits.
6. Starting a Family Foundation
Establishing a family foundation can be an effective vehicle to accomplish your charitable giving objectives. Like charitable organizations, family foundations can receive tax-exempt status if they meet certain criteria. One might consider establishing a family foundation when they experience a windfall. For example, the sale of a closely held business, the passing of a wealthy relative, or the inheritance of substantial assets. Learn more about family foundations here.
Establish Your Legacy
In addition to saving money on taxes, charitable giving plays a critical role in establishing family values and building a legacy. Simon Quick can help you plan charitable giving strategies that maximize your tax benefits while also helping you build family values. Visit our contact us page, call us at (973) 525-1000, or send an email to info@simonquickadvisors.com to discuss your situation in detail.
About Garrett Wells, CFP®
Mr. Wells joined Simon Quick in December of 2017. He is currently a vice president on the client advisory team. He is responsible for supporting the Partners and Client Advisors in assisting with financial planning for clients, implementing investment plans, preparing investment performance reports, and coordinating client communications. Garrett completed the Financial Planning Certificate Program at Fairleigh Dickinson University and became a CERTIFIED FINANCIAL PLANNER® practitioner in October 2020. Learn more about Garrett on LinkedIn.
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