When making donations to your favorite causes, tax-efficient charitable giving should take precedence. Why not maximize the tax benefit you receive from such gifts? Considering the tax implications of gifts can add to the benefit you receive. Even better, it won’t change the value of your gift to the organization that receives it.
New beginnings can lead to both excitement and challenges, particularly for women who are embarking on a fresh chapter in their lives. Whether it’s leaving a difficult personal or professional situation, losing a loved one, preparing for an empty nest, or starting a new job or career, transitional moments offer opportunities for personal growth and transformation.
Some women in this situation may find themselves fortunate enough to make a positive impact on society and support those causes closest to their hearts. While the primary motivation for most donors is the desire to make a difference, philanthropy provides an added benefit. It can lower your tax bill. Tax-efficient charitable giving enhances your tax savings from your gifts, ensuring your donations go further both for the causes you support and your financial well-being.
While have written about tax-planning strategies (see, for example, here and here) in the past, we have not focused much on charitable giving. Some of the strategies discussed this week may raise additional questions. Please schedule a call if you would like to discuss any of them further. Please note that this blog focuses on the federal income tax benefits from tax-efficient charitable giving.
1. Bunching Charitable Deductions for Women on the Rise
Women who are starting anew may find themselves in a position where they can itemize deductions on their tax returns. This is especially true if they have significant medical expenses, mortgage interest, state income taxes, real estate taxes, or charitable donations. Bunching charitable deductions is one means of tax-efficient charitable as it can provide an added benefit. It involves consolidating multiple years of charitable giving into a single year.
Let’s work through an example. Assume your filing status is single. Your 2023 standard deduction is $13,850. Assume you have the following deductions this year:
- Mortgage interest: $5,000
- Real estate taxes: $4,000
- State income taxes: $3,500
That gives you a total of $12,500 in itemized deductions before charitable contributions. If you would like to make charitable contributions this year of $2,500, you would have $15,000 of itemized deductions. That exceeds the standard deduction by $1,150. As a result, even though your charitable contributions total $2,500, you would only receive an additional tax benefit of $1,150. If you simply claimed the standard deduction, you would get another $1,350 of deductions (the difference between $13,850 and $12,500).
What if you did this instead? Wait until January 2024 to make this year’s charitable contributions. Make your regular contribution for 2024 in 2024. That gives you $5,000 in charitable contributions next year. It would be even better if you could also make your charitable contribution for 2025 in 2024, too. Why? Let’s see:
|Real Estate Taxes||$4,000||$4,000||$4,000|
|State Income Taxes||$3,500||$3,500||$3,500|
|Total Itemized Deductions||$12,500||$20,000||$12,500|
If you “bunch” your charitable contributions, you can claim $47,700 ($13,850 + $20,000 + $13,850) over the three-year period. If you donate the same amount each year, you end up with total itemized deductions of $45,000 ($15,000 per year for three years). That means you can deduct $2,700 more by bunching your deductions. (Please note: Your standard deduction will likely increase over time due to inflation. The amount of mortgage interest you pay will likely go down over time as you repay your loan. Real estate taxes and state income taxes will most likely increase from year to year.)
By bunching charitable contributions, results in more tax-efficient charitable giving. It helps you claim more value from their charitable contributions. This can result in a considerable financial benefit during a time of change.
2. Donate Appreciated Assets
For women navigating new beginnings, having a stable financial foundation is vital. One of the most tax-efficient ways to give to charities is by donating appreciated assets such as stocks, real estate, or other investments. By doing so, women can not only support their chosen causes but also potentially avoid capital gains taxes. How so? When you donate an asset, you can claim a deduction for its fair market value on the day you donate it. But you don’t pay taxes on any gains. This type of tax-efficient charitable giving helps you make the most of your assets while also aiding the community.
We can work through an example to help you envision the benefit of donating appreciated assets. Assume you have a long-term holding of 1000 shares of XYZ stock that you originally purchased for $10 per share. You made a good investment, and those shares are worth $40,000 today. You want to donate $4,000 this year to help fund breast cancer research. If you sold 100 shares of stock to raise $4,000, you would report a gain of $3,000 ($40 x 100 shares – $10 x 100 shares). If you are in the 15% capital gains tax bracket, you would owe $450 in federal income taxes on this sale ($3,000 x 15%). That would also leave you with a net of $3,550 ($4,000 – $450), so you would need another $450 to make your $4,000 donation.
What if you donated the shares directly to the charity instead? You could claim a deduction of $4,000, but you wouldn’t owe any taxes on the gain. In other words, you would save $450 in capital gains taxes. This strategy would also lead to more tax-efficient charitable giving.
3. Qualified Charitable Distributions (QCDs) from IRAs
I haven’t written extensively about QCDs in this blog in the past, so I will devote more attenti3. on to this tax-efficient charitable giving strategy.
A Qualified Charitable Distribution (QCD) is a tax-efficient charitable giving strategy that allows you to make charitable contributions directly from your Individual Retirement Account (IRA) to eligible charities. QCDs are specifically designed for individuals who are 70½ years or older and have traditional IRAs. These distributions, known as Qualified Charitable Distributions (QCDs), count toward your Required Minimum Distribution (RMD) and are not counted as taxable income. This can be especially advantageous for retirees looking to minimize their tax liability. (Please note that the state tax rules on QCDs vary.)
Key Features and Benefits of QCDs:
- Exclusion from Taxable Income: One of the most significant advantages of QCDs is that the distributed funds are not considered taxable income. This can be especially beneficial for retirees who want to maintain a lower adjusted gross income (AGI) for tax purposes. This could be the case if you have significant medical expenses. In 2023, you can only deduct medical expenses to the extent that they exceed 7.5% of your AGI. Since funds distributed through a QCD do not represent taxable income, QCDs help you keep your AGI lower.
- Satisfying Required Minimum Distributions (RMDs): Under current law, the IRS mandates that you must start taking Required Minimum Distributions (RMDs) from your traditional IRA when you reach the age of 73. By making QCDs, you can satisfy all or part of your RMD for the year without it being treated as taxable income. This can reduce your overall tax liability. If the QCD amount equals or exceeds the RMD amount, then the RMD is considered satisfied and doesn’t have to be taken.
- Limitations: You can make QCDs of up to $100,000 annually. Please note that beginning in 2024, this figure will be indexed for inflation. In addition, if you and your spouse file a joint tax return, you may each make QCDs of up to $100,000 from your respective IRAs.
- Eligible Charities: QCDs can only be made to eligible charitable organizations, specifically those that qualify as tax-exempt entities under section 501(c)(3) of the Internal Revenue Code. Donations to private foundations, donor-advised funds, and supporting organizations are generally not eligible.
Steps to Make a QCD:
- Age Requirement: You must be at least 70½ to make a QCD.
- Distributions Directly to Charities: The distribution from your IRA must be made directly to a qualified charity. It should not be sent to you first. Why? That could result in different tax implications.
- Proper Recordkeeping: Keep records of any QCD transactions for tax reporting purposes.
Why Use QCDs as a Tax-Efficient Charitable Giving Strategy?
QCDs represent a tax-efficient charitable giving strategy that allows you to enjoy additional tax benefits. They can help:
- Reduce Taxable Income: Since QCDs aren’t included in your taxable income, they can potentially help you stay in a lower tax bracket, which can have a positive impact on your overall tax liability. Reduced income could also make it easier to keep the level of your Medicare premiums down. (See this blog and here for more information.)
- Satisfy RMDs: QCDs can be a smart way to meet your RMD requirements while supporting charities, especially if you don’t need the entire RMD amount for your living expenses.
- Streamline Giving: QCDs provide an easy and direct method for charitable contributions without the need to itemize deductions, which can be especially beneficial if you no longer itemize deductions due to the increased standard deduction introduced by the Tax Cuts and Jobs Act of 2017.
- More Tax-Efficient Charitable Giving: Many who are QCD eligible cannot itemize deductions meaning they won’t receive a tax benefit for their donations. You don’t include a QCD in your taxable income. That equates to receiving a tax deduction for the QCD.
It’s important to note that while QCDs offer many advantages, tax laws can change over time. Therefore, consulting with a tax professional or financial advisor is crucial to ensure you are making the most of these provisions within the current tax framework. Additionally, eligibility and regulations may vary, so always verify the specifics with the IRS or your financial advisor before making a QCD.
4. Navigating Life Transitions with Donor-Advised Funds (DAFs)
A DAF represents a separate charitable account maintained and operated by a tax-exempt sponsoring organization. Donors make one or more deposits to the account from which grants are funded and make recommendations as to how to invest the funds, which charities should receive donations, and what the grant amounts should be. You can make grants over time. However, because the sponsoring organization is a public charity, donors receive an immediate tax deduction for the entire amount of the gift(s) in the year made (subject to IRS limitations). This helps make them another means of tax-efficient charitable giving.
DAFs are an excellent tool for women looking to support various charitable causes during transitional phases. These funds offer the flexibility to make recommendations for charitable grants over time, making it easier to support different initiatives at different points in your journey.
It is important to consider your contributions carefully. Once you contribute to a DAF, you can’t unwind the transaction.
You may want to use a donor-advised fund if you follow the bunching deductions strategy. That way, you can make a large gift in one year but distribute the money to charity over time.
5. Minimizing Tax Liability during Critical Life Changes
Women undergoing significant life transitions may experience shifts in their financial situations. Strategic charitable giving can help minimize tax liability during these changes. For example, charitable contributions can offset capital gains from the sale of property or investments, potentially reducing the overall tax burden.
6. Creating a Legacy of Empowerment
For women seeking to make a lasting impact, tax-efficient charitable giving can be a way to create a legacy of empowerment. Estate planning that includes charitable bequests or trusts can ensure that their philanthropic vision endures, supporting the causes that matter most to them.
For those with significant wealth, charitable giving can be incorporated into estate planning. You can create a charitable remainder trust or a charitable lead trust to leave a legacy while minimizing estate taxes. Consult with an estate planning attorney or financial advisor for guidance on these advanced strategies.
7. Research Tax-Exempt Organizations
Not all charitable organizations are created equal when it comes to tax efficiency. Ensure that the organization you donate to has tax-exempt status and is recognized by the IRS as a 501(c)(3) charitable organization. This ensures that your contributions are tax-deductible.
You may also want to utilize outside sources to gain insights into how the charity is run. For example:
- Where does its money come from?
- How much of the charity’s funds are used to pay employees?
- How much does it pay in administrative expenses?
Answering questions such as these can help you determine if the charity is truly supporting the cause you want to help fund. You can also check this article for more helpful information.
8. Seeking Expert Advice
In times of transition, professional guidance is invaluable. Whether it’s financial advisors, tax professionals, or estate planning attorneys, women facing new beginnings should consult experts who can provide tailored strategies to optimize their charitable giving for tax efficiency.
9. Consult with Tax Professionals
Tax laws can be complex and subject to change. Seeking advice from tax professionals, such as CPAs or financial advisors, can help you navigate the nuances of tax-efficient charitable giving and ensure you make the most of available deductions.
For women embarking on new beginnings, charitable giving is not only a way to support causes close to their hearts but also an avenue to maximize tax benefits. By carefully considering the strategies outlined in this blog, women can empower themselves and their chosen causes while navigating the financial aspects of life changes with confidence. The ability to contribute to the community while also benefiting from tax-efficient charitable giving can be a valuable source of encouragement and support during times of transition. Ultimately, the goal is to give generously and strategically, knowing that your contributions are making a positive difference.
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Phil Weiss founded Apprise Wealth Management. He started his financial services career in 1987 working as a tax professional for Deloitte & Touche. For the past 25+ years, he has worked extensively in the areas of financial planning and investment management. Phil is both a CFA charterholder and a CPA.
Located just north of Baltimore, Apprise works with clients face-to-face locally and can also work virtually regardless of location.