Q: My girlfriend scolded me when I told her I had received a windfall and had written a sizable check to one of my favorite charities. She also likes to give to charity, but she says there are smarter ways to give than sending cash. Please give me some advice.
A: Smart friend, she must know about taxes. Start with a plan that lists all of your favorite 501(c)3 nonprofits. Decide how often and on what dates you want to donate to each charity. Now estimate the amount you want to donate per year.
When developing your strategy, consider the following points:
Is this unexpected windfall you received taxable? If your tax burden is higher than usual this year, it may be the year for more giving.
Are you in this for the long haul? If you prefer to give over multiple years, consider a donor-advised fund (DAF). If your giving plan is for this year only, a transfer of appreciating assets may accomplish your goal.
Take the cost basis for each of your investments (not retirement accounts). Select the holdings with the highest gains that have been in your portfolio for more than a year.
If you only want to make a one-time donation to a charity, the easiest way is to transfer a stepped-up interest. This must be transferred directly from your investment account to the charity’s custodial account. This strategy benefits both the donor and the charity. The donor pays no capital gains tax and the charity receives the full benefit of the donation without ever having to pay taxes.
Don’t donate securities that have increased in value and that you have owned for less than a year. The value of your donation is limited to your costs. And don’t donate investments that are losing money. Sell them and write off the loss on your taxes.
The standard deduction for 2024 is $14,600 for single filers and double that for married couples filing jointly. Bundling donations and other deductible expenses such as property taxes for two years (November of one year and January of the next tax year) can save on taxes. If you create a multi-year plan, you can itemize one year and take the standard deduction the next year.
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For multiple charities and long-standing donations, a DAF is a great tool to irrevocably transfer appreciating assets. This provides an immediate tax break and then grants can be sent to different charities whenever you want. A transfer of appreciating assets to a donor-advised fund allows you to make multiple donations to individual charities. Transfers can be repeated and charities added.
When donating assets with appreciation, the full market value of the donation may not exceed 30% of the adjusted gross income for the year in question. For cash donations, the DAF allows a tax deduction of up to 60% of the adjusted gross income.
A popular strategy for DAFs is to “frontload” charitable giving during high-income years. Donations can be made at any time and claimed as itemized deductions. Cash, stocks, and mutual funds are all allowable investments and are sold and reinvested in the DAF. This is one of the easiest and most tax-efficient ways to donate to multiple charities over multiple years, with the account growing (tax-free) as we choose the charities!
Assets in DAFs are invested by the donor, who chooses from several broad-based investment categories. These investments remain in the DAF until grants are approved.
Although rare, a sponsor may reject a grant if guidelines are not followed. The fund administration (Fidelity, Schwab or Vanguard, to name a few) carefully reviews before approving donation requests. Charities must qualify and donors must not receive a benefit. If a dinner or show is included, it would be best to pay the amount of the benefit with taxed dollars from a separate account. The DAF can pay the donation without the benefit. It is best to pay the value of the show or dinner from personal funds.
DAFs charge about 1% of the fund’s assets and typically a minimum of $50 per donation. After the donor dies, a successor can be named to take over the DAF.
When you reach age 70½, you can send qualified charitable contributions (QCDs) directly from your IRA. If you are required to take required minimum distributions (RMDs), the QCD can count toward your current-year requirement if the custodian transfers money or you write checks directly from your IRA to the qualified charity before the deadline. RMDs that are not given to charity usually appear on the front page of the 1040 tax return, so not taking a taxable RMD saves ordinary income tax and can also save on Medicare premiums.
You are considering establishing a private foundation? Most have high minimum investments and complex administrative and legal reporting requirements. They can be funded by individuals, families or businesses and most are organized for educational, charitable, religious, scientific or literary purposes.
Foundations are especially useful when the goal is to employ family members and leave a family legacy; private foundations are often passed down from one generation to the next. If the private foundation no longer serves its purpose or has become too time-consuming to manage, an irrevocable gift can be transferred to a DAF, where a donor can give to favorite charities and direct the investments.
Do you not feel comfortable giving during your lifetime? Change the beneficiary of your IRA, but NOT your Roth. Charities don’t pay taxes, so leave the taxable IRA to the charity and the Roth to your favorite superstar and top earner.
Before you donate, identify your preferred charities, calculate contribution amounts, set donation dates, review tax implications, and work with experienced advisors to make tax-wise giving decisions.
Mary Baldwin, CFP®, is a fee-only advisor at Buckingham Strategic Wealth in Indian Harbour Beach. She can be reached at 321-428-4555 or [email protected].
For informational and educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Individuals should speak with a qualified financial and tax professional, depending on their circumstances, to determine if the above strategy is applicable. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved this information, determined its accuracy, or confirmed its adequacy. R-24-7542.
