4 Charitable Giving Strategies

Building wealth and financial security for your family is a wonderful thing, but there are many benefits – both financially and personally – to giving away some of that wealth. There is a lot to be said for the satisfaction received from making an impact in the lives of others by giving our time, talent, and treasure.

But first, any charitable giving strategy begins with having the right intentions. You should be compelled to give because it’s to a cause or organization you feel strongly about. We’re going to look at ways of giving efficiently, but that isn’t the driving force. Another important consideration is whether you itemize deductions on your taxes or not. If you take the standard deduction, you may not benefit from some of these techniques.

1. Gifting appreciated assets

If you have highly appreciated stock, maybe from your employer’s stock options, or you just bought a great stock years ago, this could be a good approach. Normally when you sell an asset like a stock for a gain, you pay a capital gains tax on the growth. However, if you gift the stock to a charity, you get a deduction (if you itemize) for the market value of those shares without paying that capital gain. Since the charity does not pay taxes, they can then sell those shares tax-free and use the proceeds to further their cause. Sounds like a win-win to me! The greater the tax gain in the asset, the more beneficial this strategy becomes to the donor.

2. “Deduction-Lumping” using a Donor-Advised Fund

As mentioned earlier, if your giving doesn’t raise your itemized deductions above the standard deduction ($25,100 for Married Filing Jointly in 2021), then you will not get a tax benefit for those gifts. But if you are close, you can “lump” two years’ worth of charitable giving into one to get a larger deduction. For example, maybe you give $10,000 per year, but your itemized deductions only amount to $20,000. In that case, you would still take the standard deduction. But if you gave $20,000 in one year, your total itemized deductions would be $30,000 giving you an extra $4,000 over the standard. The following year you would take the standard deduction and then alternate back and forth every other year.

Often when executing a strategy like this, givers will utilize a Donor-Advised Fund (DAF). With a DAF, you donate to the DAF which acts as a personal foundation, making it count as a deductible gift at that time, but then spread out paying those gifts over time. So, you could make two years’ worth of gifts today, but spread them out over those two years. For instance, you could front-load those gifts to the DAF to get the larger deduction, then give monthly from the DAF.

3. Donate from your IRA

This is one of my favorite giving strategies; it’s called a Qualified Charitable Distribution or QCD. A QCD allows you to give to charity directly from an IRA. There are two big advantages to this:

  1. The QCD counts towards satisfying Required Minimum Distributions (RMDs).
  2. The distributions do not count as income at all.

It is more impactful to have the QCD not count as income at all because it’s not a deduction of income, it is eliminating taxable income. That could affect the tax rates on your other income as well, possibly putting you in a lower tax bracket, reduce the tax on Social Security or limit any surcharges on Medicare. It’s a great thing!

It’s important to note that QCDs can only be done from IRAs, not 401(k)s and that you must be 70 ½ to begin QCDs. You also must write a check directly from the IRA account for it to qualify.

4. Charitable Trusts and Gift Annuities

Who says you have to give and get nothing in return? Using a Charitable Remainder Trust (CRT) or a gift annuity could provide you with a stream of income over your lifetime, with the remaining assets going to your charity of choice. Charitable Lead Trusts (CLT) work in the opposite manner, it would give annually to the charity leaving the remainder to beneficiaries.

These advanced strategies are complicated but can have a large impact when large gifts are being considered.

Always consult your financial, tax and legal advisers before implementing any of the giving strategies discussed. The tax code is complicated. But it can very well be worth the effort to utilize one or more of these approaches. You can do good, by doing good.