Do you want to help those less fortunate than you or to contribute to the common good? A financial advisor can help you leverage your contributions by making them in a tax efficient manner. This could mean donating appreciated stock, or using untaxed retirement funds. You may want to set up a Donor Advised Fund to make gifts anonymously, to involve your family in charitable giving, or optimize your tax deductions. We can even help set up a retirement stream of income combined with a charitable gift.
As experienced tax planners, we can guide you on the most effective way to structure your estate to leave your tax-inefficient assets to charity and leave your heirs a relatively tax-free inheritance.
Giving to charity, under the new tax rules
As a result of changes in the new tax law, fewer than half the number of households that used to be able to deduct charitable donations will be able to, starting with 2018 donations.1 This change is primarily due to the elimination or reduction in other allowable deductions and the near doubling of the standard deduction to $12,000 for singles and $24,000 for couples. If you are one of the 21 million households that now have fewer itemized deductions than your standard deduction, what are your options for reducing taxes with your charitable donations?
Bunch your donations
If you are close to the standard deduction, you may be able to ‘bunch’ deductions from two years into one, so that you can take the standard deduction in one year and itemize your deductions in alternate years. For example, rather than donating $1,000 each year, you might donate $2,000 every two years. Combined with bunching other deductions, such as medical expenses, that might put you over the standard deduction.
Use money from your IRA
If you are required to make withdrawals from your IRA because you are over 70 1/2, you can direct your IRA custodian to send some or all of the required withdrawal directly to a charity. Normally you would owe tax on the full IRA withdrawal, but by using a Qualified Charitable Distribution (QCD), you can exclude that amount from being taxed. The advantage to this strategy over just deducting it, is that your taxable income affects other issues such as how much of your Social Security is taxable, and whether you are subject to additional Medicare premiums. Note that the donation must be transferred directly from your IRA. It doesn’t count if you withdraw the money and then you donate it. You can also use this strategy from an inherited IRA, if you are over 70 ½.
Donor Advised Fund
Setting up a Donor Advised Fund (DAF) allows you to bunch multiple years of donations into one larger donation in a single tax year, but then allows you to spread your actual donations to charities using your standard schedule. For example, if you plan to give $2,000 a year to the local food bank, you can donate $10,000 to a DAF and deduct that full amount immediately, and then request that the DAF make a $2,000 grant to the food bank each year for the next 5 years.
Donating Appreciated Assets
Given the rise of the stock market over the past decade, you may have long term investments that have grown in value. Even if you can’t itemize your deductions, by donating the investment directly (rather than selling it yourself and donating cash), you can avoid paying tax on the capital gains. If you live in a state that also taxes capital gains, you would save even more. Combining investment donations with a DAF can be an even better strategy.
Consult your financial advisor to understand the options for your unique situation.
At Milestone Financial Planning, you will work directly with one of our CERTIFIED FINANCIAL PLANNER™ practitioners and be supported by our entire team. Our team has a fiduciary responsibility to our clients. We incorporate tax advice into our financial planning, as taxes are an integral part of any financial planning decision. This is an important distinction between our service offering and what other advisors may offer. We also coordinate your plan with your other advisors – estate planning attorneys, insurance agents, CPAs, etc.