This article provides an overview of the current giving environment and introduces you to five donors whose strategies can help you maximize your charitable impact while reducing your tax liability. These examples might inspire you to consider how similar approaches could fit your broader financial goals.
2024 Giving and Tax Landscape
Charitable giving is a win-win, benefiting both those in need and the generous individuals who give. Gifting to charities can be done in a manner where Uncle Sam covers part of the donation and/or provides you with an opportunity to make a larger donation. Here are some tax-smart giving strategies:
Five Donors Putting Tax-Smart Giving Strategies into Action
Let's explore how five donors are applying different giving strategies to achieve their philanthropic goals:
1. Suzette: Donating Highly Appreciated Stock
Suzette owns 1000 shares of XYZ stock, in which she has a basis of $25 per share. The stock has risen in value to $50 per share, bringing her total holdings to $50,000. By donating the stock directly to charity, Carla avoids paying long-term capital gains taxes and maximizes her charitable contribution. Her tax savings are essentially two-fold by avoiding the capital gains tax and receiving the charitable deduction for the full current value.
2. Steve & Sally: Bunching Charitable Contributions
To maximize their deductions, Steve and Sally bunch two years of charitable contributions into one. This approach allows them to exceed the standard deduction threshold and benefit from itemizing deductions. By timing their donations, they increase their total tax deductions over the two years, enhancing both their charitable giving and tax efficiency.
Steve and Sally make use of Donor Advised Fund (DAF) when bunching their charitable contributions. Donating to a DAF allows you to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund over time. This strategy is particularly useful if you want to take advantage of a high-income year or if your charitable intentions allow you to exceed your standard deduction. Contributions to DAFs can include cash, which is deductible up to 60% of your adjusted gross income (AGI), or appreciated non-cash assets, deductible up to 30% of AGI.
3. Anita: Using QCDs to Satisfy RMDs and Lower Taxable Income
Anita is over 70½, has a large IRA and faces a substantial RMD. By choosing a tax-smart approach—making a Qualified Charitable Distribution (QCD) instead of taking the Required Minimum Distribution (RMD) income and donating cash—Anita lowers her adjusted gross income. This strategic move reduces her taxable income providing a significant tax benefit.
4. George: Offsetting Roth IRA Conversion Taxes with Charitable Donations
George plans to convert his traditional IRA, worth $100,000, to a Roth IRA. To offset the $24,000 tax liability from the conversion (assuming a 24% tax bracket), George donates $100,000 worth of appreciated stock to charity. His charitable deduction equals the amount of his conversion, neutralizing the additional tax burden.
5. Jennifer: Donating Private Business Interest
Jennifer, a co-founder at Corporation ABC, holds a concentrated position in her company's stock. To diversify her portfolio and achieve her philanthropic goals, she donates shares of ABC stock to a DAF. By doing so, Jennifer eliminates the capital gains taxes she would incur if she sold the shares and donated the proceeds. Her tax savings, calculated by multiplying the fair market value of her donation by her income tax rate, exceed the potential savings from a cash donation.
Important Considerations
Each charitable giving strategy has specific rules and requirements. It's crucial to consult with a tax expert to understand how these strategies apply to your unique situation. By planning carefully, you can make a meaningful impact on the causes you care about while maximizing your tax benefits.
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