When investors donate money to charitable organizations important to them, both parties benefit – the charities receive the funding they need to make a difference in the community and investors are able to take advantage of tax deductions. But handing over cash may not be in the best interest of the investor or the receiving organization. Why would this be the case? A donor may be able to leverage a more tax-advantaged donation method and make a larger contribution, maximizing his or her impact.
For donors wishing to maximize their charitable impact while reducing their tax liabilities, an IRA charitable contribution, or the transfer of appreciated securities through a Donor Advised Fund (DAF), may be the smartest route.
IRA Charitable Contributions or Qualified Charitable Distributions
An IRA charitable contribution, or Qualified Charitable Distribution (QCD), is a direct transfer of funds from your IRA paid directly to a qualified charity . Note that any contributions made by the donor post-distribution do not count as QCDs. The funds must be transferred directly from the donor’s IRA account to the charity.
These types of distributions are particularly beneficial for donors who must take a Required Minimum Distribution (RMD) from their retirement account but are not in need of the funds. RMDs paid to an IRA owner result in taxable income which may lead to bumping an account holder into a higher tax bracket, cause a larger portion of social security benefits to become taxable, and/or phaseout of other tax deductions. However, a Qualified Charitable Distribution allows donors to satisfy RMD amounts while keeping that amount out of taxable income.
Here are a few rules to keep in mind when considering the QCD option:
- You must be at least 70 ½ years of age to use an RMD to make a QCD.
- Traditionally, deductions for charitable donations require that you itemize, however, QCDs do not.
- Important Note: Many find that they are not able to itemize under the new tax laws, which results in a loss of tax deduction for charitable donations. QCDs can provide a way to take the standard deduction and gain tax benefits for donating to charity.
- These distributions must be made by the December 31st deadline to count towards that calendar year.
Donor Advised Funds
If you are not yet 70 ½ or wish to make a more significant donation, transferring appreciated securities through a Donor Advised Fund (DAF) may be the way to go. A DAF is essentially a charitable investment account created specifically to support your favorite charities. They also afford donors a number of tax benefits:
1) Avoid Paying Capital Gains Tax: While you can donate cash to these funds, donating long-term appreciated securities like stocks, bonds, or real estate can potentially help minimize the capital gains taxes you would otherwise incur if you sold the securities outright and then donated the proceeds.
2) Immediate Income Tax Deduction: With a DAF, you are eligible to take an income tax deduction of the assets’ full-market value in the year you contribute to the DAF.
3) Estate Tax: DAFs are not subject to estate taxes.
4) Tax-Free Growth: DAFs allow investments to grow tax-free.
Given these tax breaks, it’s no wonder that donor-advised funds are growing rapidly as a charitable vehicle.
Deciding What is Best for You
Juggling your taxable income, required minimum distributions, and charitable giving can be a tricky endeavor. These decisions, if made in haste, could cost you a pretty penny. And what works for one investor may not provide you the same advantages. Consulting a team of trusted financial professionals can have a big impact on your annual taxable income, eligible deductions, and long-term financial plan.
If you are unsure about how to best leverage your charitable giving against your annual income and retirement distribution schedule, our team of advisors at Resolute Wealth Advisor is here to help. Pull up a chair and let’s chat, or, to learn more about how much we value charitable giving at Resolute, visit our website to learn about ! We look forward to meeting you.
Investment Advisory Services offered through Resolute Wealth Advisor, Inc., a Registered Investment Advisor.
Resolute Wealth Advisor does not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary based on the client’s individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor before establishing a retirement plan.