Tax-Efficient Strategies for Charitable Giving

It is better to give than receive, as the adage goes. Retirees living on a fixed income may worry about financially sustaining charitable giving into their later years. Staying informed about the rules surrounding contributions and following simple strategies will enable retirees to support their favorite organizations and causes while enjoying the tax benefits. Here are a few pointers for smart donating. 

Get organized

Itemizing taxes can reduce the overall tax bill. Keep track of all charitable donations and consider the applicable deductions. Note that the organization must be an IRS-qualified 501 (c)(3) public charity. The standard deduction amount varies according to the filing status (single, married filing jointly, etc.). If the amount of the charitable donations made throughout the year is greater than the appropriate standard deduction amount, itemizing is the way to go. Keeping all donation information together and organized will make itemizing easier. 

Learn which expenses are tax-deductible

Charitable giving qualifies as a tax deduction. To declare a tax deduction on a contribution, a filer must itemize all deductions on the return and forego the standard deduction. The sum of all itemized deductions must be more than the standard deduction. Additionally, the donation must be made to an IRS-qualified 501 (c)(3) public charity. Other expenses that qualify for deductions include:

  • Medical and Dental costs
  • State and local tax
  • Mortgage interest
  • Rent in some states

Understand tax brackets and how they impact deductions

Filing status and taxable income determine taxpayer brackets, and the system is tiered. Most taxpayers are actually in more than one bracket. This means a portion of the filer’s income is taxed at a particular rate in each bracket for which a taxpayer qualifies. The top-most tier is a filer’s “tax bracket.” The corresponding tax rate is known as the “marginal tax rate.” Because deductions reduce taxable income and are taxed at the marginal rate, a filer may move to a lower income bracket through charitable giving. 

Consider Schedule A alternatives and options

A qualified charitable distribution (QCD) reduces taxable income regardless of whether deductions are itemized on a return. Those with Individual Retirement Arrangement (IRA) accounts age 70½ or older can transfer tax-free up to $100,000 annually from their IRA. For seniors who are a minimum of 73 years old, a QCD can satisfy the required minimum distribution (RMD) for the year. To be tax-free, the QCD must be a direct payment by the trustee or owner of the IRA to a qualifying charitable organization. Additionally, if the donor has already met the RMD for the year, the QCD will not count toward it. Finally, an IRA holder making a QCD must declare it on their tax return, but it will not be deductible on the Schedule A form as a charitable contribution. Donors must obtain a written acknowledgment of the transaction from the eligible organization before filing. Check with the IRA custodian to ensure proper payment and adherence to guidelines. 

Another vehicle for charitable giving is a donor-advised fund (DAF). This type of fund is tax-deductible, grows tax-free, and affords flexibility and privacy to the donor. It also groups deductions for easy itemization. Once again, only IRS-qualified public charities are eligible for grants from a DAF. A DAF holder can donate cash, stocks, assets, real estate, and cryptocurrency. Contributors can remain anonymous if they choose. Note that DAF accounts are offered through a sponsoring organization or financial institution that may assign fees or limit the types of charities or giving options.

Beware of capital gains

Long-term appreciated assets such as stocks, bonds, and real estate don’t require capital gains payments if donated to a qualified charity. According to the IRS, they are tax-deductible at the fair-market value up to 50% of the itemizer’s adjusted gross income, depending on the type of contribution and charity. Limitations between 20 and 30% apply in some cases. If the owner wishes to gift assets (as opposed to cash) to an heir or family member, the recipient will not need to pay capital gains until they sell those assets. Real estate has a few more guidelines and exceptions on capital gains, so benefactors should check with an advisor about those situations. 

Retirees can comfortably experience the joys of giving throughout their lives with proper planning and awareness of the tax ramifications of their contributions. Sound financial advice helps retirees use charitable giving to their advantage, and everyone wins. SHP Financial’s goal is to ensure clients are making smart tax moves to help protect their portfolios. Click here to schedule a no-cost, no-obligation financial review and learn more about tax-efficient giving strategies. 

The content presented is for informational purposes only and is not intended as offering financial, tax, or legal advice, and should not be considered a solicitation for the purchase or sale of any security. Some of the informational content presented was prepared and provided by tMedia, LLC, while other content presented may be from outside sources believed to be providing accurate information. Regardless of source no representations or warranties as to the completeness or accuracy of any information presented is implied. tMedia, LLC is not affiliated with the Advisor, Advisor’s RIA, Broker-Dealer, or any state or SEC registered investment advisory firm. Before making any decisions you should consult a tax or legal professional to discuss your personal situation.Investment Advisory Services are offered through SHP Wealth Management LLC., an SEC registered investment advisor. Insurance sales are offered through SHP Financial, LLC. These are separate entities, Matthew Chapman Peck, CFP®, CIMA®, Derek Louis Gregoire, and Keith Winslow Ellis Jr. are independent licensed insurance agents, and Owners/Partners of an insurance agency, SHP Financial, LLC.. In addition, other supervised persons of SHP Wealth Management, LLC. are independent licensed insurance agents of SHP Financial, LLC. No statements made shall constitute tax, legal or accounting advice. You should consult your own legal or tax professional before investing. Both SHP Wealth Management, LLC. and SHP Financial, LLC. will offer clients advice and/or products from each entity. No client is under any obligation to purchase any insurance product.
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