Contributing to charity goes beyond occasional donations to your favourite causes. To amplify your impact and make your philanthropic efforts feel more purposeful and efficient, consider strategic, long-term planning that also offers potential tax advantages. Here’s a streamlined approach to becoming a more strategic philanthropist, structured into progressive steps:
Step 1: Exceed the Standard Deduction
Since the 2017 Tax Cuts and Jobs Act significantly increased the standard deduction, fewer people benefit from itemizing deductions. However, you can still take advantage of itemizing by carefully planning your charitable contributions to exceed these new thresholds. For example, combining charitable contributions with other deductible expenses to surpass the standard deduction can make itemizing worthwhile.
Imagine you’re planning to donate $15,000 to various charities and have $10,000 in deductible state and local taxes. This total of $25,000 exceeds the standard deduction for single filers, making itemizing beneficial for you.
Step 2: Bunch Your Charitable Contributions
Bunching involves consolidating multiple years of charitable donations into one tax year to maximize your deductions above the standard deduction threshold. This strategy is particularly effective under the current tax laws that favor higher single-year deductions.
- Example: Suppose you typically donate $5,000 annually. Instead of giving each year, you decide to donate $15,000 every three years. This approach can significantly boost your itemized deductions in the bunching year, providing greater tax savings and allowing you to make a more substantial impact with your donations.
Step 3: Establish Donor-Advised Funds (DAF) and Charitable Trusts
Donor-advised funds act like a charitable investment account where you can contribute cash, stocks, or other assets. Contributions are tax-deductible in the year they are made, but you can distribute funds to charities over many years. This setup not only offers immediate tax benefits but also allows your donations to grow, increasing your philanthropic capacity.
- Operational Insight: When you contribute to a DAF, you immediately receive a tax deduction for the year the donation is made. For example, if you contribute $20,000 to a DAF, you can claim the entire amount as a deduction that year, regardless of when the funds are eventually given to charities.
Charitable Trusts are another powerful vehicle for strategic giving, allowing you to donate assets like real estate or stocks into a trust. This can provide you with income for a period or for your lifetime, with the remainder going to charity after a certain time or your death. This strategy is particularly beneficial for those with larger assets looking to reduce estate taxes while supporting charitable causes.
- Legal Structure: A charitable remainder trust, for instance, can provide you with a stream of income from the donated assets, along with immediate tax deductions calculated based on the value of the assets and the income terms.
Step 4: Take Advantage of Qualified Charitable Distributions (QCD)
Qualified Charitable Distributions offer a tax-efficient method of donating to charity directly from your Individual Retirement Account (IRA) once you reach the age of 70½. This approach not only supports the charities you care about but can also confer significant tax benefits.
How QCDs Work
- Direct Transfers: QCDs must be directly transferred from your IRA to a qualified 501(c)(3) charitable organization. This means the funds should not pass through your hands; instead, the IRA custodian should transfer the amount directly to the charity.
- RMD Fulfilment: If you are required to take minimum distributions from your IRA, the amount donated as a QCD counts towards fulfilling your Required Minimum Distribution (RMD) for the year.
- Tax Exclusion: Amounts donated as QCDs are excluded from your taxable income. This is particularly advantageous because it lowers your adjusted gross income (AGI), which can affect various tax credits and deductions, including Social Security and Medicare premiums.
Step 5: Leverage Charitable Trusts for Larger Gifts
Charitable trusts allow you to contribute larger assets like real estate or stocks to a trust that pays you or your designated beneficiaries income for life or a set period, after which the remainder goes to your chosen charities. This method can be especially advantageous for those holding highly appreciated assets.
- Legal Structure: A charitable remainder trust can provide you with regular income and a partial tax deduction, based on the donated asset’s value and the income beneficiaries’ life expectancy.
Government Sources and Professional Advice
For accurate and up-to-date information, always refer to IRS publications or consult with a financial advisor to ensure compliance and optimization of your philanthropic strategies. IRS Publication 526 provides detailed guidance on charitable contributions and can be a valuable resource.
By adopting these strategies, not only do you benefit from potential tax savings, but you also create a lasting impact with your charitable efforts, making your philanthropy as effective as possible. Take some time to research. Speak to our advisor to explore the best strategies tailored to your philanthropic goals and financial situation.
