Charitable Giving Strategies: Being Generous While Being Tax-Savvy

Nov 29, 2023

If you engage in regular charitable giving but are still writing checks out of your checking account, you may be leaving money on the table in the form of valuable tax savings.

The current standard deduction1 for tax filing creates a high hurdle before seeing tax benefits from charitable gifts of cash because you need to have a sizable amount of itemized deductions before you will see any marginal tax benefit from the gifting. This is especially true for married couples in retirement that do not have a mortgage.

You can improve your situation and take control of tax benefits for your generous giving. You just need some good strategic planning to create your charitable giving “playbook.”

“Lumping” Charitable Giving Using a Donor-Advised Fund (“DAF”)

Unless you are giving a large amount each year, you are likely with the other ~90% of Americans who will just take the standard deduction each year – thus unlikely getting tax benefits for those charitable gifts. It may be time to consider giving a larger (or “lumped”) amount every 3-5 years to push deductions over the standard deduction level, then just take the standard deduction you would get anyways in the years in between those “lumped” gifts.

While this is a good strategy for taxes, most people want to be able to give on an annual basis rather than larger amounts occasionally. Enter the Donor-Advised Fund (“DAF”) – in simple terms, this is like a charitable giving “checking account” that you can pre-fund (and get the deduction benefits in that one year), then choose the timing for how you distribute that money in future years. You can also invest those funds for growth while you are waiting to distribute gifts to charity.

Appreciated Assets

Whether you are funding a DAF or would like to give directly to a charity, one key strategy to consider is the use of appreciated assets. For example, gifting stock instead of cash to fund the DAF can give you the dual benefit of getting the deduction benefit and bypassing capital gains tax on that asset (the tax on the appreciated portion). You can also gift appreciated complex assets such as private investment holdings, real estate, restricted stock, cryptocurrencies and others.

The key is to plan early with a qualified advisor to see if the asset is eligible and start the appropriate steps ahead of time. As there are a few limitations, it is also good to have a solid tax advisor in your corner to help with these considerations.

Qualified Charitable Contributions (“QCDs”)

If you are 70 ½ or older, there is another option for the charitable giving playbook: Qualified Charitable Distributions (“QCDs”). This is a gift from your IRA straight to the charity that also counts towards your RMD (“Required Minimum Distribution”). For example, if your RMD for the year is $50,000 and you give $10,000 via the QCD, your taxable distribution on your tax return is only $40,000. This is the equivalent of getting a $10,000 deduction from charitable giving for taxes – and you don’t have to worry about the standard deduction threshold as the amount comes “off the top” of the earnings amount you need to report (and lowers taxable earnings for State returns as well).

As the QCD can help control AGI (“Adjusted Gross Income”), it can also be helpful when navigating the IRMAA (“Income Related Monthly Adjustment Amount”) thresholds that affect the Medicare premiums deducted from your Social Security monthly check. If you are just over the tipping point of having a higher assessment, using a QCD strategy could lower your AGI to avoid this.

Planned Giving and Charitable Trusts

If you are concerned about your estate being taxed at your passing (the Estate Tax)1 then you might want to leave a portion of your estate to charities (via will, trust or beneficiary designation) to minimize how much estate tax might be owed. You can also create trusts, such as Charitable Remainder Trusts or Charitable Lead Trusts, where you can retain access to income or ultimate ownership of the asset while locking in tax benefits when it is most advantageous. While these strategies are more complex, the tax savings can be meaningful. Please talk with your investment advisor, legal advisor and tax advisor to see what works best for you.

While this type of planned giving can make sense for tax management, it is also a good strategy when you want to leave a charitable legacy but aren’t quite ready to part with assets that are critical for supporting your retirement lifestyle. In other words, you are committing to leaving a portion (or all) of what is left for charitable causes when it is known you won’t need it anymore. charities appreciate knowing your intentions and it helps them plan, particularly if you are considering leaving funds for long-term support, such as through an endowment. Be sure to talk with the charity ahead of time about your intentions to ensure that your gift is used to support the organization the way you desire.

In conclusion, it is important to know your options and talk with your advisor about your approach to charitable giving. If you are a client of NPF Investment Advisors, please reach out to your advisor to discuss these options. If you do not currently work with an advisor or would like to see if NPF can add value to your financial situation, please reach out to us any time

1 $27,700 for married filers and $13,850 for single filers, with additional amounts available for 65+ and blind taxpayers

2 For reference, the current estate tax exemption is $$12,920,000 per spouse. This means that if your final estate value plus non-excluded lifetime giving is below that amount (or $25,840,000 per married couple), you would not likely be taxed. However, it is possible that we see this exemption amount decreased, or you could see the value of your estate get closer to that exemption level over your lifetime as assets grow. Work with your advisor to analyze your projected net worth to see if this is a risk for you.

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