If you are charitably inclined, what is the most tax efficient way to give to those charities?
Let us start with standard deduction versus itemized deductions. Your itemized deductions must exceed your standard deduction for any tax benefit. There is a caveat for 2021, cash donations up to $300 for single filers and $600 for Married Filing Joint are allowed as above the line deductions.
If you are taking the standard deduction on your tax return, consider bunching a few years’ worth of charitable donations into one tax year. You can either give directly to the charities or use a Donor Advised Fund. A Donor Advised Fund is like your own little charitable fund that you make donations from. When you contribute money to the Donor Advised Fund, it is a completed gift. You can then send out whichever donations you want to make at any time throughout the year or next several years.
Another tax efficient way to give to your favorite charities is through a Qualified Charitable Distribution from your IRA. You must be 70 ½ to do this. If you donate directly from your IRA, then the amount given is not taxable. This is truly tax-free money-you did not pay tax when you contributed to the IRA and giving it directly to charity from your IRA avoids tax as well. There is a limit of $100K per year for Qualified Charitable Distributions.
Gifting highly appreciated stock can be another strategy. If you purchased the stock at a low price and have significant gains, you do not have to sell the stock to produce the cash to give to charity. Most charitable organizations have an account where you can send them the stock and they sell it. This way you avoid having to pay any capital gains tax and your stock gift is valued on the date that you send it to the charity.
If you have significant wealth and are looking for ways to gift your wealth to charities, there are a number of complicated trusts that can be set up, but this requires an estate attorney that specializes in these gifting strategies.
Also, do not forget that the charities must meet the IRS’s definition of a qualified charity for any of these strategies to work.
Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted. Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.