At TrustCore, we consistently see charitable giving as a key priority in our clients’ financial goals. As advisors, we work to maximize the dollars our clients can contribute to their favorite causes. Below you’ll find two key strategies we use to improve the tax efficiency of charitable gifts.
As a quick litmus test, if you have been writing checks to charities, this article may help you increase the impact of your giving.
Donor advised funds (DAF)
The easiest way to make charitable contributions is to give cash, but a more efficient way is to give appreciated assets. Generally in the latter, the donor receives the full value of the gift as a charitable deduction on their tax return and neither the donor nor the recipient owes any tax on capital gains realized. A DAF can be a great tool to efficiently gift appreciated assets to charities over time.
Here’s how it works.
As an example, a new client recently came to us with large capital gain positions in a taxable brokerage account and a pattern of consistent charitable giving based on previous years’ tax returns. We thought a DAF would allow them to gift appreciated securities. In addition, cash that was earmarked for charitable donations could be rerouted back into the portfolio to replenish the funds given away.
To put numbers to it, let’s say a couple has taxable income of $250,000 and gives away $15,000 annually. They own an ETF purchased six years ago for $20,000 that is now worth $40,000. The couple can gift that position to their DAF and, if eligible to itemize their tax deductions, receive the full $40,000 in charitable deductions this year. This is an itemized tax savings of approximately $7,200. Also, they potentially avoid capital gains taxes of $3,760 on the position if they were to sell it instead. The couple now has at least the next two years of gifting already saved away in their DAF to grant as they see fit.
This strategy is attractive for clients nearing the end of their peak earnings years with a retirement date on the horizon. Assuming they continue to have taxable appreciated assets, it makes sense to pre-fund giving during the remaining high-income years, using the DAF as a holding account. This allows for a higher tax deduction and creates earmarked funds for charitable giving to continue.
Leveraging your IRA
Attaining age 70 is an important milestone in the financial world, as age 70½ begins the clock on the Required Minimum Distribution (RMD) for anyone with IRA assets. The IRS allowed your IRA to grow over time on a tax-deferred basis, but now require that you begin taking a certain amount out annually, taxed as ordinary income. A recent law passed making Qualified Charitable Distributions (QCDs) permanent for people who are subject to RMDs. The QCD is a distribution made from an IRA directly to a charitable organization that satisfies some or all of the participant’s RMD, up to $100,000 maximum per year. Funds withdrawn from an IRA in this manner are not subject to ordinary income tax.
As you can see, there is an advantage to using donor advised funds in high-earning years to avoid capital gain taxes, then switching to IRA Qualified Charitable Distributions once eligible. These two planning tools are a great way to save money, give more, and enjoy the emotional and financial benefits of helping others.
If you have a desire to give efficiently and begin a planning relationship, please contact us.
Financial planning and investment advisory services offered through TrustCore Financial Services, LLC. Investments offered through TrustCore Investments, LLC, member FINRA and SIPC®. This is not an offer, or solicitation of an offer, to buy or sell any security investment or other product.
Important Information and Disclosures
Readers are encouraged to conduct their own independent research. This information is intended to be limited in scope and provide basic educational information on presented topics. Data represented is believed to be from reliable sources.
TrustCore makes no warranty concerning such information. TrustCore expressly disclaims all representations and warranties that: (a) the content is correct, accurate, complete, or reliable; (b) any of the information will remain available for any amount of time or in any medium; and (c) that any omission or error will be corrected. The information contained in this presentation should not be considered a solicitation, offer, or recommendation for the purchase or sale of any securities, other financial products, or services and should not be regarded as a description of services offered by TrustCore. TrustCore shall not be held responsible or liable for any damages or losses, whether direct, indirect, incidental, special, consequential, or exemplary, that arise or result from the use of such information.
The information contained herein is presented with the understanding that the individual authors, presenters or organizers are not rendering financial, legal, accounting or other professional advice or opinions on specific facts or matters, and accordingly assume no liability whatsoever in connection with its use. The foregoing information should not be regarded as offering a complete analysis or opinion on any provision of local, state or federal law. You should not attempt to implement any of the planning strategies set forth in this content without first obtaining competent, professional advice from a qualified individual or firm.