When working with clients to help facilitate their charitable giving, questions usually fall into two broad categories: 1) How do I make sure that my giving is having the impact I want it to? and 2) How do I make sure I am receiving the maximum tax benefits for my giving? These are very different questions, but when addressed together they can help ensure that charitable giving brings positive change to our community and is rewarding to the donor.
Making Meaningful Gifts
Many donors feel that they are being pulled in too many directions when it comes to their giving. They are constantly being asked to support a variety of causes – whether those causes are personally meaningful to them or not. By the end of the year, they may feel they have exhausted their budget for giving without really making any gifts that align with their values. One way to address this issue is to start each year with a clear plan for what you want to support. By establishing a giving budget and committing the largest portion to causes with which you are personally involved, it becomes easier to pass on gifts that are less meaningful to you. You can set aside a portion of your annual budget for gifts when you are approached by friends or family, but having a clear plan makes it easier to say “no, maybe next year.” If you aren’t sure which organizations are deserving of the largest portion of your support, volunteering is a great place to start. Whether working at a food shelf, giving tours at a museum, tutoring in a school, serving on a board committee, or cleaning up a local park, there are many ways to get to know an organization better. It’s easier to commit your dollars to a cause when you have seen the work in person and understand the impact the gift will have on the organization and people they support.
Making Tax-Smart Gifts
Very few donors give charitably primarily for tax benefits, but tax savings can be an additional benefit of charitable giving. Recent tax law changes make it harder for individuals to itemize their tax deductions where you could typically claim charitable gifts, but even if you don’t normally itemize, there are still ways to receive a tax benefit from your giving.
- Appreciated Stock: If you have stocks, mutual funds, or ETFs in your taxable investment accounts that you have held for at least one year, a direct gift of stock to charity can help reduce taxable capital gains. Appreciated stock can be transferred directly to a charity, which can then sell the stock tax-free. In addition to avoiding the capital gains tax, gifts of stock are tax-deductible up to 30% of adjusted gross income (AGI). Even if you do not currently itemize your deductions, gifting appreciated stock will reduce your overall capital gains tax liability over time.
- Donor Advised Funds: A Donor Advised Fund (DAF) is an account managed by a sponsoring charity on behalf of a donor. You can open and contribute to a DAF in any year and make recommendations for distributions to qualified charities in the future. A DAF allows you to separate the tax aspect of your charitable giving from the impact of your gifts, and is a great tool for unusually high-income years or to take advantage of itemized deductions in a single year while spreading your charitable gifts over multiple subsequent years (sometimes referred to as “bunching” deductions). As an example, you can donate $30,000 of stock in the current tax year to a DAF, avoid paying capital gains tax on the stock, and claim $30,000 as a charitable contribution on your tax return. Then, you can give the $30,000 to charitable organizations over many years as part of your giving plan.
- Qualified Charitable Distributions: If you are over age 70 ½, you can make a qualified charitable distribution (QCD) from an IRA directly to a charity without paying income tax on the distribution. You can make QCDs of up to $100,000 per year per person, and any amount distributed to charity will count towards your annual required minimum distribution (RMD), potentially reducing your taxable income for the year. You cannot claim these gifts to charity on your itemized deductions but they will reduce the amount you have to claim as income on your tax return.
As previously mentioned, a charitable giving strategy will be unique and personal and should start with your desire to give back to organizations that matter to you. If you have questions on how to maximize the contributions you are making or would like assistance creating a charitable giving strategy, please contact your JNBA Advisory Team.
Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors, LLC.
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