Our wealth management clients are generous people who want to use their wealth to help make the world a better place, so charitable giving is often an important part of their investment plans.
We’ve helped clients establish foundations and fund endowments at leading academic institutions.
Charitable giving is one of the high impact, tax-smart strategies that can help clients simultaneously support the causes they are passionate about and save money on taxes.
So what’s the best way to donate to charity? Here are six gifting approaches that we consider for clients that could help you maximize your deductions.
1. Gift highly appreciated non-cash assets
Too often we hear from investors who sell securities in order to gift money to their family members or to charitable organizations. But if you itemize deductions on your taxes, you’re likely better off giving highly appreciated securities, usually stocks. This can minimize your taxes and maximize your philanthropic impact.
When you donate appreciated assets to a public charity, you can claim the fair market value of that stock as an itemized deduction of up to 30% of your 2021 adjusted gross income (AGI). Donations in excess of this can be carried forward for use for the next five years. By gifting shares, you’ll also avoid paying capital gains taxes on this security.
2. Bunch your annual donations
The standard income tax deduction was raised considerably in 2018, which was a challenge for investors who itemize their deductions. One solution is to bunch two or more years worth of charitable contributions into a single year. Front-loading your donations can lead to maximizing your deductions and generating higher tax savings. The goal here is to have the financial capacity to pack all of your deductions (beyond the standard deduction) into the current year.
3. Contribute to a Donor Advised Fund (DAF)
Not sure which charities you want to support this year? A donor-advised fund can help. You can contribute to a DAF now and immediately qualify for a charitable tax deduction, and then you can give grants to charities when you’re ready to do so. Plus once your DAF is funded, you can invest the assets until you decide to donate it, which gives your contributions the opportunity to grow over time. A growing number of our wealth management clients are using donor-advised funds.
4. Donate direct cash gifts
If you itemize deductions, you can deduct up to 100% of AGI for cash contributions to charities in 2021. Deductions above this AGI limit can be carried forward into the next five years. If you take the standard deduction, you are still permitted to deduct up to $300 ($600 for married filing jointly) in 2021 for cash charitable gifting. Corporations can contribute up to 25% of taxable income in 2021.
5. Make qualified distributions from your IRAs
Clients who are 72 and older can contribute up to $100,000 per year from their IRA to a charity, tax free, to fulfill their required minimum distribution (RMD). Making qualified charitable distributions (QCDs) is appealing for clients who have other deductions or are already close to their charitable deduction limitations. While the RMD age is now 72, you can start making QCDs from your IRA starting at 70 1/2.
6. Take advantage of new IRA deductions or your Roth IRA conversion
If you are 59 1/2 or older, you can take IRA distributions and use deductions for charity donations to offset your income tax liability, reduce your taxable estate, and minimize the tax liability for your account beneficiaries. The 2020 CARES Act permitted cash deductions of up to 100% of AGI for 2021. The assumption here is that you are not dependent on existing retirement funds for future cash flow.
If you are converting a portion of your IRA assets into Roth IRA in 2021, making a large tax deductible contribution to a charity is a good way to offset conversion taxes.
Get a customized approach to meet your financial and charitable goals
FundX investment advisors develop customized strategies for our wealth management clients based on their cash flow, earned income in the current year, taxable assets and tax planning, and we often review these plans as a team that includes a Financial Planner and a CPA. Let’s talk about how we could help you use your wealth to meet your financial and charitable goals.