If you’re a charitably inclined individual or business, there’s no better time than now to give back, especially after the challenges of the past few years. There are countless reasons to be generous, whether it’s supporting your local community or contributing to causes that matter to you. Not only does charitable giving allow you to make a positive impact, but it can also be a wise financial decision for your portfolio. Incorporating charitable donations into your financial plan—whether through estate planning, generational wealth building, or tax strategies—can benefit both you and the causes you care about.
Donating your money to a cause you care about is certainly rewarding, but it can also save you money if you are thoughtful and intentional about your charitable donations. While charitable giving is tax-deductible, you will only get the benefit if you itemize your deductions. This means that taking the standard deduction will make your charitable giving meaningless for your tax deduction. This is a perfect example of why you should align your giving with your overall financial strategy.
So, before simply writing a check to support your favorite charity, consider incorporating one of these giving strategies that could maximize your generosity.
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.
Contributions to your DAF can provide a current year’s tax deduction, then be invested to grow tax-free. This may result in more dollars for the organizations you support when you decide to transfer the assets. The funds allow you to contribute anything from cash to appreciated securities to real estate to life insurance that can help to further lower your tax bill. If you donate cash, you typically receive an income tax deduction of up to 60% of your adjusted gross income (AGI). If you donate appreciated securities, you save on the capital gains tax and your deduction will be the full fair market value, up to 30% of your AGI.
Once the money is out of your hands, you don’t 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 recommend. According to the legal setup of these accounts, the organization that holds your DAF isn’t required to follow your “advice,” but there’s an understanding that they will.
A simple example that takes advantage of tax benefits and minimizes your taxable income involves the required minimum distributions (RMDs) you are required to withdraw from your retirement accounts when you turn 73. (Note: Under the SECURE 2.0 Act, that RMD age will rise to 75 in 2033.) But what if you don’t need that money for living expenses? Current tax law allows you to gift your RMD directly to a charity and avoid paying taxes on the distribution. This can be a great strategy for those with sufficient income streams who don’t want to pay excessive taxes.
If you have an IRA, you may be able to get a tax benefit for your charitable donations through a qualified charitable distribution (QCD), even if you take the standard deduction. QCDs are distributed directly from your IRA account to the charity of your choice. It can count toward your required minimum distribution for the year, and it does not count toward taxable income, so you don’t have to pay any taxes on it. You must be age 70½ or older to begin making these distributions.
A charitable remainder trust (CRT) is a trust that not only provides an income stream but passes the remaining value to charities of your choice when you or your beneficiary dies. It allows you to convert an appreciated asset into lifetime income. With the trust, you technically donate the asset to charity before it is sold, which allows you certain tax benefits, including a charitable deduction. You will receive more income over your lifetime by using a charitable remainder trust than if you had sold the asset yourself, and you even gain creditor protection for it. It also provides other important tax benefits and, best of all, you get to contribute to charitable causes that are near and dear to your heart. And 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.
All of your charitable contributions can be filed with your taxes, qualifying you for certain tax deductions and reducing your overall tax bill. Make sure to always ask for a receipt anytime you give a donation (cash or non-cash), and file it safely with the rest of your financial documents and with your financial professional. Once tax season arrives, bring your receipts and your paperwork to your CPA so you can get an accurate picture as to which tax deductions make sense for your donations. Always include a copy of your receipts with your tax forms as proof.
Every financial situation is different, so a one-size-fits-all approach isn’t an effective approach. Depending on the details of your portfolio, there may be additional ways to enhance your charitable giving strategy.
Our team at Wealth Advocate Group would be glad to meet with you, review your unique circumstances, and explore how we can optimize your contributions. Feel free to schedule a no-obligation consultation by contacting me at 440-505-5751 or email jcohen@Wadvocate.com to get started.
Jason Cohen is Chief Operating Officer and wealth advisor at Wealth Advocate Group, LLC, an independent, fee-based wealth management company. Jason has 15 years of experience and spends his days managing firm operations, including portfolio trading and analysis, training of new advisors, financial plan production, and client relationship management. Jason specializes in serving real estate professionals and other independent contractor business owners, helping them navigate their unique financial challenges, such as unpredictable cash flow and tax issues, so they can pursue financial independence. Jason has a bachelor’s degree in public management from Indiana University and is a CERTIFIED FINANCIAL PLANNER® professional and believes that everyone should have access to comprehensive financial planning. He is passionate about doing his best for his clients and setting others up for success. Outside of the office, you can find Jason staying active in a variety of sports and spending time with friends and family. Learn more about Jason by connecting with him on LinkedIn.
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