by Christian Hudspeth, CFP®
As we approach the season of generosity, you may find it heartwarming to know that more than 50% of all US households (and 81% of affluent households) donate to qualified charities of all kinds each year according to CCS Fundraising’s Philanthropic Landscape Report.
Almost all (97%) who donated said their decision to give was because it made a “real or perceived impact of their gift” as a major motivating factor.
But what if I said that many of these generous people – the ones who wrote checks from their bank accounts or gave cash — could have given between 15% to 37% more “impact” at no extra cost to them? Or saved 15% to 37% in taxes without reducing their gift?
That’s right. By using even one of these tax-smart donating strategies, here’s how they – and you — could maximize your giving to charitable causes and minimize your taxes at the same time.
Tax-Smart Giving Strategy #1: Charitable Stockpiling with Cash
Instead of giving a certain amount to your favorite charity each year, what if you “bunched” several years of giving in one tax year? That would allow you to itemize your deductions and save on income taxes compared to just donating and taking the standard deduction.
Let’s say this tax year you paid $10,000 in property taxes, $5,000 in mortgage interest and planned to donate $10,000 to charity. Because that’s a lower amount than the standard deduction of $27,700 in 2023, you’d only be eligible to deduct $6,094 in federal income tax at a 22% tax rate ($27,700 X 22%).
But if you were to instead bunch three years of giving and donated $30,000 on top of the $15,000 you paid in property tax and mortgage interest, that would allow you to claim $45,000 in itemized deductions for a tax savings of $9,900 ($45,000 x 22%).
That’s about $3,800 more in tax savings in a single tax year, and three times more going to your charity of choice now rather than later. A win-win.
Tax-Smart Giving Strategy #2: Donate Appreciated Stock and Other Securities
Donating stock shares — especially appreciated shares that you’ve owned for a while – can sometimes be even better than giving cash because you can give without having to sell shares and triggering capital gains tax.
For example, let’s say you worked for XYZ Corp and the company gave you $25,000 in XYZ stock awards over the years. By the time you left the company your shares tripled in worth to $75,000.
You want to give back to society. Assuming you pay a 15% tax on your $50,000 capital gain, you could sell your shares, pay $7,500 in capital gains tax, and donate the remaining $67,500 in cash proceeds to receive an itemize deduction for that amount.
Or, you could instead donate your shares directly to a charity that accept securities. That would allow you to give all $75,000 (10% more) to a qualified charity while also receiving an itemized tax deduction for $75,000.*
This strategy is not limited to just stock shares. It works for shares of mutual funds and ETFs as well.
*Up to 30% of your adjusted gross income if they’re long-term securities, or 60% of your AGI for short-term securities. If the donation is larger than those percentages, you can carry forward the deduction for up to five more years.
Tax-Smart Giving Strategy #3: Donating Appreciated Stock to a Donor Advised Fund (DAF)
This option allows you to bunch several years of giving, donate appreciated shares of stocks/ETFs/and mutual funds, and gives you the flexibility to distribute your gifts to many charities over time.
Let’s say you had $30,000 worth of appreciated securities to donate. You could donate them into a Donor Advised Fund (DAF), which could allow you to claim $30,000 in itemized deductions in one tax year (up to 30% of your adjusted gross income if they’re long-term securities, or 60% of your AGI for short-term securities).
From there, the securities can either stay as-is in the DAF or be sold and diversified without taxation. And instead of having to give to just one charity and all at once, you can disburse your $30,000 donation to any 501C3 qualified charitable organization whenever you want, and to as many of them as you want.
For example, using a DAF, you could distribute out your $30,000 donation over the next three years if you were accustomed to giving $10,000 per year. Or distribute from the DAF over 10 years if you wanted to give $3,000 per year. The flexibility is yours.
Tax-Smart Giving Strategy #4: Donate RMDs to Save on Taxes
Are you expecting taxable Required Minimum Distributions (RMDs) that you don’t really need to live on? Do you donate every year anyway? Qualified Charitable Distributions (QCDs) allow those in this situation to keep giving while reducing their taxable income.
IRA owners over age 70.5 can use QCDs to donate directly from their IRA to a qualified charity. And because these qualified withdrawals are excluded from taxable income up to $100,000 per year (adjusted with inflation), the withdrawals are not taxable and won’t push you into higher tax brackets or raise your Medicare Part B premiums due to IRMAA charges.
Make Your Donations Smarter, Not Harder
While donations of any kind arguably make the world a better place, think twice before you simply write a check to your favorite charity. Because you and the receiver could be giving the world – and your wallet — far more value with some simple planning techniques.
In fact, these are just a few strategies our financial advisors and planners use to help our clients donate thousands of dollars more while reducing their taxes each year. A trusted financial advisory team working with your personal financial plan as your framework can:
- Take an overall look at your income needs and charitable wishes,
- Consider your three “tax buckets” – pre-tax retirement dollars, Roth dollars, and taxable investment dollars,
- And optimize your withdrawal and charitable giving strategy to minimize your taxes and maximize your giving
All while keeping an eye on your portfolio so you won’t outlive your money even through market downturns.
Happy giving!
More from FMP Wealth Advisers:
30 Itemized Deductions You May Have Been Missing Out On
3 Ways the Tax Cuts and Jobs Act Can (and Will) Affect Your Charitable Giving
Is Now the Best Time for a Roth IRA Conversion?
*The information presented here is not specific to any individual’s personal circumstances. FMP Wealth Advisers is not providing investment, tax, legal, or retirement advice or recommendations in this article.
**To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
***These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
