This is the time of year when thoughts turn to helping others in need, whether with monetary donations, volunteer time, or charitable legacy planning. And receiving a tax deduction for your gift is an added bonus, for sure. Note that the $300 (single filers) or $600 (joint filers) “above the line” charitable deduction that has been available as part of the CARES Act the last few years has expired and won’t be available on your 2022 tax return. You’ll need to itemize your deductions to receive a charitable deduction. If you don’t have typically have enough itemized deductions to total more than your standard deduction, consider “bunching” your gifts and donating 2 years’ worth of gifts in one tax year.
While you are making your charitable giving plans, here are some other tips to maximize the tax benefit of your good deeds:
Rather than donating cash to your favorite charity, donate appreciated investments instead. Perhaps you bought stock many years ago that is now worth much more than you paid for it. If you give the stock to the non-profit, and they sell it, they don’t have to pay the tax on the capital gain since they’re a tax-exempt entity. But you still receive a tax deduction equal to the full fair market value of the appreciated investment. A winning strategy!
Here’s an easy way to “bunch” your charitable gifts, as I mentioned above. Set up a Donor Advised Fund – which you control as the trustee. You write a check or donate appreciated securities to it, and you get to take your full tax deduction. Then, you get to decide which charities your Donor Advised Fund gives to, and how often. There is no requirement for the DAF to distribute the funds in the same year it receives them. And this is a great way to pull your family into charitable giving. For example, set up a “Smith Family Donor Advised Fund”, and then each year at the holidays have your family gather together and decide which charities the Fund should donate to. What great role modeling for your kids and grandkids!
If you are taking Required Minimum Distributions (RMD’s) from your IRA’s, and in turn writing a check to your church or charity, wait a minute! You need to know about the Qualified Charitable Distribution (QCD) rules where the IRS allows you to donate your RMD’s (up to $100,000) directly to your non-profit, and not count that RMD as income on your tax return. So, this directly reduces your taxable IRA income, regardless of whether you itemize or not. Who knew the IRS could be so kind? This is a great way to restore a tax deduction for charitable giving that you aren’t otherwise receiving if you don’t itemize your deductions. The key is that you cannot take possession of the RMD funds first – the money has to flow directly from your IRA to the charity of your choice. Interestingly, the tax code left the QCD age at 70 ½, even as the RMD age increased to 72. So you don’t have to wait to start gifting away your tax-burdened IRA. One other caveat is that you cannot use QCD’s to fund your own Donor Advised Fund.
Perhaps you would like to leave some money to your church or charity as a lasting legacy. Great idea! Here’s the tax-smart way to do that: Instead of designating the gift in your will, designate your non-profit as a beneficiary on your IRA’s beneficiary form. Why? Because IRA assets are taxable as ordinary income to your heirs, but not taxable to your favorite charity. So give away your taxable IRA assets and let your heirs inherit your after-tax investments instead. And of course, you can designate a percentage of your IRA to your favorite charity – you don’t have to gift away 100% of the account. Another benefit to this strategy is that IRA beneficiary forms are easy to change, so if you want to swap out charities down the road you won’t have to pay an attorney to update your will.
Or maybe you like the idea of leaving some of your IRA money to your favorite charity but you hate to think of short-changing your family’s inheritance. One solution is to use a portion of your RMD’s and buy permanent life insurance. Then you can freely give that taxable IRA to your non-profit knowing that your family will receive a tax-free life insurance payout. Now everyone is happy! (Except perhaps the IRS) And before you throw this idea out, thinking that life insurance is too expensive if you’re over age 70, please think again. It’s more affordable than ever, especially if you set up a joint life insurance policy for you and your spouse. Or you could even have your adult child be the insured and your grandkids be the beneficiary. The premiums would be super affordable using the younger age of your adult child, and your grandkids are probably your favorite beneficiaries anyway!
If you’re not sure which charities you want to support, charitynavigator.org is a great resource to help you narrow in and vet where you’d like your gifts to go. I’m sometimes asked if giving money to family or friends who are in need could be deducted as a charitable gift, but it cannot. The gift has to be given to a IRS designated 501(c)(3) organization to be deductible.
With some deliberate thought and implementing even one of these tips, you’ll be on your way to cementing your legacy, leaving the world an even better place than you found it. And you can benefit too, along the way. For example, I particularly enjoy designing charitable strategies where the tax deduction can be used to offset the income created by Roth IRA conversions. You support your favorite charity and create tax-free Roth IRA wealth for you and your own family at the same time. Tax planning and charitable giving is not just for the rich – it’s for anyone who wants to choose where their hard-earned money goes – whether to taxes or to charities.