Before we begin, a quick reminder to check with your tax professional/advisor on any specifics!
Q: A huge portion of charitable giving happens in December as people wrap up their tax year. It's great for the community and non-profits, and I'm guessing can be helpful for individual financial planning as well. What are some of the benefits of charitable giving to donors?
A: Our country has a history of charitable giving, and our tax codes have encouraged us to share our treasures. Americans gave an estimated $499.33 Billion to charities (Source: ‘Giving USA’ 2023 Report) in 2022. Now, if you think about everything that happened last year- this shows that Americans’ commitment to philanthropy remains strong despite economic difficulties and other uncertainties.
One of our goals in charitable giving discussions with clients is to maximize the impact they can have on the organizations they have a passion for supporting. Oftentimes donors simply choose an amount and an organization, write a check, and move on. While, in some cases, that may be perfectly appropriate- there are additional considerations that may result in more money for the charity, and potential paths to lessen the financial toll taken on the donor.
As a result of those considerations, we find that charitable giving finds its way into many of our financial planning discussions with clients. Put very simply- we typically discuss “what” to give (the right answer is not always cash), “where” to give from (meaning what type of account are we drawing from) and “how” to give (is there a way we can structure a long-term gift to maximize its impact).
Q: Tell me more about the how to answer the “what to give” consideration
A: Sure- cash is the simplest way to give and it’s the most common. Generally, taxpayers must itemize their deductions in order to benefit from a cash contribution. That said, you can also choose to donate securities, if you’ve held them longer than a year. When donating securities, a taxpayer that is itemizing their deductions is allowed to deduct the fair market value of the security, but regardless of itemizing deductions or taking the standard deduction, the donor avoids paying capital gains tax on the unrealized gain.
So, if you’re holding onto a stock that has appreciated immensely, donating that stock will prevent you from having to pay capital gains tax- and of course, a charity doesn’t have to pay tax when it sells the security. So, depending on the situation, cash may not be the most advantageous gift when exploring a donor’s full financial picture.
Q: What is a “Qualified Charitable Distribution” from an IRA, and what are the benefits of giving this way?
A: Qualified Charitable distribution is a powerful tool for retirees. This topic falls squarely into the ‘where to give from’ part of our conversations with clients I mentioned earlier. This discussion is, of course, most applicable for listeners that are 70.5 or older and taking required minimum distributions out of a retirement account.
A “Qualified Charitable Distribution” is a direct donation from your IRA (Individual Retirement Account) to a 501c3 organization. These donations count towards your Required Minimum Distribution for the given calendar year- and most importantly, it is not recognized as taxable income for Adjusted Gross Income purposes.
This is valuable to retirees, as they’re able to donate to charity what would’ve otherwise been paid in tax. With a little planning and help from an advisor, you can satisfy your Required Minimum Distribution, use those funds to meet your giving goals for the year, and pay less in tax by utilizing a Qualified Charitable Distribution.
Q: With fewer people itemizing their deductions now, is there a better way to give to maximize your tax benefit? I’ve heard of “bunching” charitable donations together- could you explain what that means?
A: Great question- the reality is that after the Tax Cuts and Jobs Act of 2017, the vast majority of taxpayers are using the standard deductions available to them, rather than itemizing.
If you are in that majority and your itemized deductions are less than the standard deduction, your charitable donations are not deductible.
The notion of ‘bunching’ multiple years’ worth of charitable contributions together may increase your itemized deductions above the standard deduction threshold so you can receive a tax benefit for your planned gifts in that year.
To accomplish this, we can employ a charitable giving strategy known as a “Donor Advised Fund”. This involved putting a few years worth of charitable donations in their own fund that exists outside of your other investment accounts. The contribution to a Donor Advised Fund is an irrevocable gift (meaning you can’t take it back) allowing the taxpayer to take a tax deduction in the current year, but provides the flexibility in dispersing the funds to chosen charities over future years. The investments within a Donor Advised Fund do grow tax free, but keep in mind that your investment return and principal value in the fund will fluctuate.
Establishing a Donor Advised Fund can be particularly beneficial in a year where your taxable income is unusually high, as the contribution may offset the spike in income. This is a great tool to use to get your itemized deductions above the standard deduction threshold to feel a tax benefit, and when it comes to maximizing your impact to the charity- your future donations will grow tax-free inside of the Donor Advised Fund.
Q: Any other tips on giving this holiday season?
A: I would add that the use of a Donor Advised Fund, like I just talked about, is one of several vehicles for facilitating charitable goals. Other vehicles you may wish to explore include charitable trusts, foundations, pooled income funds, and gift annuities. Be sure to work with your financial professional, tax advisor, and legal advisors to learn more about charitable giving ideas and what may be appropriate for your situation.
I would reiterate that giving is rewarding, but giving intentionally and with a plan will maximize the gifts you make to your organizations of choice, and your giving story may inspire others to give themselves. So, make a giving-plan, and don’t be afraid to share your experience with others, as it may encourage them to create their own plan to give in the new year.
Interview with: Travis Taylor, Vice President – Investments, of the Williams and Roof Wealth Management Group of Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC, a Registered Broker Dealer and Non-Bank Affiliate of Wells Fargo Advisors.
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Disclosure: Wells Fargo Advisors is a financial supporter of WKMS
