Are you looking to make a meaningful difference while optimizing your tax strategy? Charitable giving can be a powerful tool for supporting causes you care about and reducing your tax burden. With the IRS allowing charitable cash contributions up to 60% of adjusted gross income in 2023 and 2024, there’s never been a better time to explore tax-efficient ways to give (source: CCH AnswerConnect).
By leveraging smart charitable giving strategies, such as donating appreciated stocks or using RMD charitable contributions, you can maximize your tax benefits while making a lasting impact. Keep reading to learn how these strategies can work for you.
How Donating Appreciated Stocks Can Reduce Your Taxes
Donating appreciated stocks can help you avoid capital gains taxes while benefiting your favorite causes. This strategy allows you to maximize your charitable impact while lowering your tax bill.
What Are Appreciated Stocks?
Appreciated stocks are investments that have grown in value since you purchased them. If you were to sell these stocks, you would likely owe capital gains taxes on the appreciation. However, when you use appreciated securities for charity, you avoid these taxes while still receiving a deduction for the stock’s full market value.
Tax Benefits of Donating Appreciated Stocks
Donating appreciated stocks can offer significant tax advantages. Understanding these benefits can help you make the most of your charitable contributions.
- You avoid paying capital gains taxes on the appreciated amount
- You receive a tax deduction for the total market value of the stock
Donating stocks rather than cash can give more to your chosen charity without increasing your out-of-pocket cost.
When to Donate Appreciated Assets
The best time to donate appreciated securities is when you have highly appreciated assets that would trigger substantial capital gains taxes if sold. By donating these assets directly to a charity, you can bypass the capital gains tax while still supporting causes that matter to you.
How to Use Required Minimum Distributions (RMDs) for Charitable Giving
Another way to reduce taxes through charitable giving is by using RMDs. This method benefits retirees who want to support charities while lowering their taxable income.
What Are RMDs and Why They Matter for Taxes
Once you reach the age of 73, you are required by law to take minimum distributions from certain retirement accounts, including traditional IRAs and 401(k)s. These withdrawals, known as RMDs, are taxable as ordinary income. These mandatory withdrawals can lead to a higher tax bill for retirees who do not need their RMDs for living expenses.
How Qualified Charitable Distributions (QCDs) Lower Your Tax Bill
A Qualified Charitable Distribution (QCD) allows you to donate your RMDs directly to a charity, thus reducing your taxable income. Using a QCD can fulfill your RMD requirement while lowering your tax bill. The donated amount is excluded from your gross income, which can help reduce the tax burden, especially for high-income individuals.
QCD Limits and Eligibility Rules for Charitable Contributions
There are specific rules for making Qualified Charitable Distributions (QCDs). It’s important to understand these limits before using RMDs for charitable giving.
Here are some important limits to keep in mind when using a QCD:
- You can contribute up to $105,000 per year through QCDs
- You must be at least 70½ years old to make a QCD
- The distribution must be made directly from your retirement account to a qualified charity
These rules make RMD charitable contributions an attractive option for retirees who want to support charitable causes while minimizing their taxable income.
Maximizing Charitable Donations with Donor-Advised Funds (DAFs)
Another effective tool for charitable giving offers greater flexibility and long-term benefits. It allows you to support your favorite causes while optimizing your tax strategy.
What Is a Donor-Advised Fund and How Does It Work?
A Donor-Advised Fund (DAF) is a tax-efficient vehicle that allows individuals to contribute assets to a fund and receive an immediate tax deduction. Once the funds are in the DAF, you can distribute them to charities over time. This flexibility makes DAFs an excellent tool for long-term charitable planning.
Benefits of Using DAFs for Tax-Efficient Giving
Donor-advised funds offer several benefits for those looking to maximize their charitable donations tax benefits. Let’s take a look:
- Immediate tax deduction
- Flexibility
- Simplified management
Combining DAFs With Appreciated Stock Donations and RMDs
You can further enhance your tax strategy by combining appreciated stocks or RMD charitable contributions with a DAF. Contributing appreciated stocks to a DAF allows you to avoid capital gains taxes while still receiving a full tax deduction. QCDs, however, cannot be directed to a DAF.
Choosing the Best Charitable Giving Strategies to Lower Taxes
Selecting the most effective charitable giving method can offer substantial tax savings. Understanding your options will help you make the best decision for your financial plan.
When to Donate Stocks, Use RMDs or a Donor-Advised Fund
The best charitable giving strategies for you depends on your financial situation and charitable goals. Here are a few factors to consider:
- If you hold appreciated assets, donating appreciated stocks can provide the greatest tax savings
- If you are required to take RMDs but do not need the income, a QCD can help you avoid paying taxes on those distributions
- If you prefer flexibility and want to make a lasting impact, consider using a DAF to manage your charitable donations over time
A combination of these strategies may provide the greatest charitable donations tax benefits while reducing your overall tax liability.
Long-Term Tax Planning Through Charitable Giving
Effective long-term tax planning often involves a blend of strategies. For high-net-worth individuals, combining charitable donations tax benefits with estate planning, investment management, and retirement strategies can lead to substantial savings over time.
Reduce Taxes While Supporting Charities
Choosing the right charitable giving strategies can help you reduce your tax liability while supporting the causes that matter to you.
Contact Fairvoy Private Wealth today to explore how our charitable giving strategies can benefit your financial plan and help you make a difference.
Fairvoy Private Wealth, is a Registered Independent Advisor based in Birmingham, Alabama. We offer comprehensive wealth management solutions, including charitable giving strategies tailored to your unique financial goals. From retirement accounts and charitable giving to tax-efficient charitable giving, Fairvoy provides the expertise you need to maximize your impact while minimizing your taxes.
Important Disclosures
The information and opinions provided herein are provided as general market commentary only and are subject to change at any time without notice. This commentary may contain forward-looking statements that are subject to various risks and uncertainties. None of the events or outcomes mentioned here may come to pass, and actual results may differ materially from those expressed or implied in these statements. No mention of a particular security, index, or other instrument in this report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security or index. The report is strictly an informational publication and has been prepared without regard to the investments and circumstances of the recipient.
Past performance does not guarantee or indicate future results. Any index performance mentioned is for illustrative purposes only and does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Index performance does not represent the actual performance that would be achieved by investing in a fund.
- This is a hypothetical example for illustrative purposes only. The chart assumes that the donor is in the 37% federal income bracket. State and local taxes and the federal alternative minimum tax are not taken into account. Please consult your tax advisor regarding your specific legal and tax situation. Information herein is not legal or tax advice. Assumes all realized gains are subject to the maximum federal long-term capital gains tax rate of 20% and the Medicare surtax of 3.8%. Does not take into account state or local taxes, if any. ↩︎