2 Charitable Tax Planning Strategies for Year-End

There are several tax-saving strategies that not only help you support your favorite qualified charity but also reduce your tax liability to Uncle Sam. Most people are well aware of giving cash or a check. But there are two not so well known high-powered, tax-saving charitable giving strategies that provide extra bang for the buck.  Prior to the year-end, consider making a gift to your favorite qualified charity using one of these two strategies.

Charitable IRA Distributions

Qualified charitable distributions (QCDs) are distributions made from an individual retirement account (IRA) directly to a qualified charity and up to $100,000 can be gifted and excluded from the taxpayer’s gross income. Individuals aged 70½ and older are allowed to take part in this charitable giving strategy and these direct donations count towards the taxpayer’s required minimum distribution. (For more, see: Take These Financial Planning Steps Before the Year Ends.)

Although the gift cannot be included as a charitable deduction on the taxpayer’s income tax return (Schedule A – Itemized Deductions), the income stays off the income tax return altogether, potentially saving the taxpayer federal taxes (and sometimes state income tax too, depending on the state of residence). This strategy was made permanent via legislation as part of the Protecting Americans from Tax Hikes (PATH) Act of 2015.

Donor-Advised Funds

A donor-advised fund (DAF) is a charitable account set up with a custodian/broker that can receive assets from an individual and subsequently the funds can be sent to a qualified charity. The owner of the DAF controls the entire process, including when to gift to the donor-advised fund, how much to gift and what asset to gift.

A tax deduction (up to 30% of AGI if securities are used) is received when making a gift to the DAF. The tax deduction is based on the market value of the appreciated security on the date that the gift is made. It is important that if securities are gifted to the DAF that they have been owned for at least one year prior to being gifted. 

This strategy works well when an individual has appreciated securities, like stocks, that he or she can gift. The asset(s) can sit in the DAF and await direction on when to be sent to the charity of choice. This strategy is excellent when an individual has higher-than-usual income, such as from the sale of a business or earning a large bonus. The individual can front load several years worth of charitable gifting in one year, thereby taking advantage of a larger tax deduction that year. Then, the individual can send smaller amounts to qualified charities from the DAF over a period of several years.

If you are looking for ways to minimize your tax obligation before the end of the year, ask your tax professional or financial advisor about these two strategies.  Although they are not complex, you will want to make sure you understand all of the rules prior to action. (For more, see: 7 Tips for Year-End Financial Planning.)

 

This is intended for informational purposes only and should not be construed as tax or investment advice. Please consult your tax and investment professionals regarding your specific situation.