The other day one of Kevin’s golf buddies mentioned getting a “double tax benefit” from his charitable giving.
“Is that possible?” Kevin wonders. “Or, did my friend misunderstand what his financial advisor told him?”
That’s our topic in this blog/video: Can you double your tax benefits through charitable giving?
Charitable giving basics
As we work with clients, we find that many want to take some of the money they’ve saved for retirement and give generously to their churches, favorite charities, or other nonprofit organizations.
There are various ways you can do that, and the government treats them differently tax-wise. Understanding those differences can enable you to stretch your giving significantly.
Gifts of cash
You can always just write a check to a charitable organization, but you only get to write that gift off if you itemize your deductions on your tax return.
In 2024, the standard deduction for a single filer is $14,600. For married filing jointly, it’s 29,200. Let’s say you want to itemize your deductions on your tax return. In the last calendar year, you and your spouse gave $10,000 to your church and you also have $5,000 in mortgage interest. You can see that even with a few other deductions, they’re not likely to add up to more than the standard deduction. That means you won’t be able to write off your charitable giving.
Qualified Charitable Distributions (QCD)
One of the ways that you can use the standard deduction and also get a write-off for your charitable giving is by doing a qualified charitable distribution or a QCD.
To do this, you have to be at least 70 and a half years old. If you meet that requirement you can give a gift directly from your traditional IRA to the non-profit of your choosing.
Let’s say the custodian of your IRA is Fidelity. At the end of the year, they’ll send you a 1099 showing the taxable distribution that you took from the IRA (to make that gift).
Fidelity only knows that you withdrew money from your IRA (they have no way of knowing what you did with that money). So, they will send you a 1099. It’s your responsibility to give your tax preparer a receipt showing that you did give that IRA money to the charity. That way you won’t be required to pay taxes on the distribution.
In short, by making such a qualified charitable distribution, you can give money (up to $100,000 a year) directly to charity from the IRA and claim both benefits: the standard deduction benefit and the charitable gift as well.
Donor-Advised Funds (DAF)
A donor-advised fund is another way to give money away and potentially get extra tax benefits for doing so.
Here’s how a DAF works. You have a donor (i.e., you). You set up a donor-advised fund. You give your gift there.
For example, let’s say you give $100,000 to a donor-advised fund. You’re allowed to take an income tax deduction in the year that the gift occurred. Once it’s in the donor-advised fund, you have the option to distribute that money to charity whenever you want. The money does not have to be distributed in the same year as the gift. Many donors like this option because they can decide how they want their money in the donor-advised fund to be invested. Until it’s distributed to a charity or ministry, it can continue to grow.
Each year as you have charities you want to support, you can distribute money from the DAF to them as you wish. If the account grows, you can do even more gifting over time. Keep in mind, however, that the tax deduction only happens in the year that you give the money to the DAF. Gifts can be cash or non-cash assets.
There are no limits to the amount of gifts that you can give. But the gifts are irrevocable. This means the gifts must go to a public 501(c)3 entity, and they cannot be taken back once gifted. Also, the account that you set up has to be titled as a donor-advised fund.
Now let’s talk about the tax deductibility of the gift because there are some limits. If you make a cash gift, it can be up to 60% of your adjusted gross income. That means if your adjusted gross income is $100,000, you can only give away $60,000 or less and have it be deductible.
If you choose to give away a non-cash asset, it can be up to 30% of your adjusted gross income.
There are some carry-forward allowances, meaning gifts can be carried forward for up to five years.
So, let’s go back to our previous example of someone having $100,000 of adjusted gross income and they give $100,000 of a cash gift. They can only write off 60% of the gift in the first year–or $60,000. The following year, they could use the rest of it with the carry forward until they’ve used it all up. Again, you only have five years to use up the carry-forward amount. To get this deduction, you must itemize your deduction on your taxes.
So, the deductions need to be higher than the standard deductions. To reach that limit, you may need to do some planned “batching” of your gifts. Since the standard deduction right now is $29,200 for a couple, depending on the size of the gift you want to make, it may mean that you don’t give to charity for several years in a row and then you batch the gifts together and give one large amount into a donor-advised fund so that you can take advantage of the itemized deduction.
Now when it comes to giving cash, it’s pretty clear how that works. You write a check, and you send it to the donor-advised fund to fund the account.
But if you want to talk about an additional, potential tax benefit, let’s talk briefly about gifting highly appreciated assets.
Giving Stocks and Other Assets
Let’s say you have $100,000 of highly appreciated Amazon stock. You bought it way back in the day for $10,000. The market value is $100,000; your cost basis is $10,000. If you sold the stock and realized the gain, you would owe $16,920 in tax liability. How’d I get that figure? By multiplying $90,000 in profits times 18.8% for estimated long-term capital gains. That comes to just under $17,000 in taxes owed.
However, if you gave the stock directly to the donor-advised fund, you could give the full $100,000, and you would not owe the $17,000 in capital gains taxes. That’s tax benefit number one.
The other benefit is that the $100,000 gift to the donor-advised fund can also become a $100,000 deduction on the current year’s tax return.
That’s significant. If you were in the 24% tax bracket and you lowered your taxable income by $100,000, you’d avoid paying taxes on $100,000 of your other income. At a 24% rate, that’s $24,000 in tax savings!
Think of that. You eliminated about $17,000 of capital gains taxes that you would have paid and you lowered your current income tax amount by 24,000. In short, you got a double benefit.
Comparing the Options
Let’s compare these two gifting strategies: the donor-advised fund and the qualified charitable distributions.
For a donor-advised fund, you have to itemize your tax deductions to gain the benefit. You can also gift highly appreciated assets that can get a double benefit.
Now, the limits for the deductibility are tied to your adjusted gross income, which may be lower for some people in retirement. But remember, you do have five years of “carry forward” to stretch it out.
When we look at qualified charitable distributions the first restraint is that you have to be 70 and a half years old. But one of the benefits is that gifts are above-the-line deductions, which means there’s no need to itemize. You can still use the standard deduction and use this deduction.
Now there’s a $100,000 per person limit per year on those gifts, and they have to come directly from a traditional IRA. So, you can not give highly appreciated assets when using qualified charitable distributions.
The qualified charitable distribution is probably easier. But there are benefits to using donor-advised funds as well.
Tax Planning
Many of the people we talk to are like Kevin and his golf buddies…they’re extremely interested in tax planning and charitable giving.
Maybe that’s you too. If so, if you’d like more help with this sort of planning…or if you still aren’t sure about all your options and have more questions than answers, visit our website, christycapital.com. There–in the top right corner of the page–you’ll see a green TALK WITH AN ADVISOR button. Click it, and leave us a short message. We’ll be in touch right away.
At Christy Capital Management, we help our clients create wise giving strategies. We’d love to help you too.
