Donor Advised Funds
Donor Advised Funds function like investment accounts where an individual or family can deposit funds into the account, invest the funds for growth, and then dole the funds out to individual charities over time. They allow individuals to take the entire tax deduction (up to IRS limits) in the year they are deposited into the Donor Advised Fund. We’ve had many clients utilize this for weekly and monthly giving. For more information, our own Alex Perkins has written a great blog on the subject.
Bunching Charitable Donations
Many of you are aware that with the new 2017 tax changes, fewer people will itemize their deductions due to the higher standard deduction and capped deduction for state and local taxes. In comes “bunching” charitable deductions. Bunching deductions allows taxpayers to squeeze itemized deductions into one year to get over the standard deduction and lower total taxes over multiple years. This often comes in the form of prepaying property taxes, smart scheduling of elective medical procedures, or making months or years of charitable donations at the same time. Making a lump sum charitable donation can be socially difficult for some people by not having the weekly act of donating in church or similar regular giving. You are technically giving the same amount overall, but it can feel strange to some individuals.
If you’re over age 70 ½: Qualified Charitable Distributions
If you’re over age 70, you likely have already begun to take Required Minimum Distributions from your tax-deferred retirement accounts (i.e. IRAs). This is the annual amount that the IRS mandates you take out from your IRA. Occasionally, the required withdrawal amount is larger than you may need for living expenses. For this situation, we often recommend that our clients shift any charitable giving they may already be doing to their IRA.
The process works as follows: Say you give $100/week to your church. This adds up to $5,200 a year and you take that deduction on your taxes if you itemize deductions. Your required minimum distribution on your IRA is $10,000. You withdraw this amount and it is taxable. But what if you don’t itemize your taxes so you cannot take that tax deduction? By switching your $100/week donation to your IRA, your church receives the same amount and the taxable portion of your required minimum distribution is reduced to $4,800 therefore reducing your ordinary income taxes.
For our Schwab clients this is made even easier by ordering a checkbook for your IRA specifically for charitable donations.
Note: For your IRA distributions to be tax-free, they must go to a 501c (3) tax-exempt charity.
Donating Appreciated Assets
When selling assets held outside of tax-advantaged retirement accounts, such as a stock holding in a brokerage account, you are taxed at the lower capital gains tax rates on the growth of the stock. For those of you regularly liquidating assets from your taxable accounts while also making cash donations to charity, there might be a more efficient solution. Rather than selling an asset and using part or all of the proceeds to fund donations, consider giving the asset directly to charity. When you donate a high gain asset to a charity, you are saving yourself from those high capital gains and the charity does not pay those taxes when they sell that asset. This method could save you up to 23.8% in taxes!
Many of these methods could also be combined for multiple tax savings. At WealthPoint we work with our clients and their CPAs to determine how best to achieve their charitable goals in the most efficient manner possible.
If you are charitably inclined and want to know if any of these methods fit into your financial plan, please don’t hesitate to request a meeting with your WealthPoint advisor.