Tax Smart Philanthropy Part 2: The Trailblazer's Guide to Giving

Hiking the Path to Maximum Impact and Tax Benefits

When giving a financial gift, it is essential to consider the result you hope to achieve beyond just monetary gain. For instance, you can use the gift to teach life lessons and encourage thoughtful spending habits or pay for an experience that provides critical life lessons, such as a family vacation. It's essential to consider the level of control you want over the gift, including its purpose and timing.

Creating a roadmap for giving is an excellent idea to ensure you stay on track and have the most impact with your donations. 

Here are some steps to follow:

1. Define your giving priorities: What causes are you most passionate about?

2. Set specific goals: How much do you want to give, and to which organizations?

3. Determine a budget: How much can you realistically give, and how often?

4. Evaluate the impact: How will you measure the effectiveness of your giving?

5. Be flexible: Allow room for adjustments to your plan based on changing circumstances or new information.

It is crucial to consider other factors, such as the potential future tax liability for the gift recipient. If your passion lies with giving while living, consider strategies such as outright gifting, funding a Roth, setting up a donor-advised fund (DAF), or gifting stock and mutual funds.

On the other hand, if you are passionate about giving in retirement or at death, you may want to consider strategies such as a Qualified Charitable Distribution (QCD), Charitable Remainder Trust, Charity as a Beneficiary, or Gift of Real Estate.

In short, creating a giving roadmap is key to ensuring that your donations make the most impact while reducing your tax burden. By defining your priorities, setting goals, and budgeting, you will be well on your way to making the world a better place while being smart with your money. With various giving options, like QCDs and Charitable Remainder Trusts, you can maximize your tax benefits while leaving a meaningful legacy.

Tax-Efficient Giving: Navigating the Taxation Landscape for Charitable Donations

Cash donations are the easiest and most direct way to give, and they are fully deductible up to 60% of your Adjusted Gross Income (AGI). For 2023, the annual exclusion is $17,000, and you get a lifetime exclusion of $12.92 million. Married couples can exclude double that amount in lifetime gifts as it is per person. 

The gift tax return keeps track of that lifetime exclusion. So, if you don't gift anything during your life, you have your whole lifetime exclusion to use against your estate when you die. (Orem et al.)

Stocks and other appreciated assets offer significant tax benefits as you can deduct the total fair market value of the assets and avoid paying capital gains tax on any appreciation. Stock and mutual fund gifts can be a sentimental treasure trove. Witness your gift grow together, year by year, instilling a legacy of financial savvy and pride. 

But watch out for the potential gains tax trap. If you give a gift that has already grown in value, the recipient assumes the cost basis and must pay the gains taxes if they sell in the future. However, if they inherit the gift, they get a "step-up in basis," meaning the gains tax disappears. If you're in a higher tax bracket and gifting to someone with lower taxable income, the gains taxes may be minimal.

Regarding gifting property, real estate can be a challenge. The tax deduction for appreciated real estate is limited to 30% of your AGI, and the deduction for gifts of property used in a trade or business is capped at 50% of AGI. You must have owned the property for at least one year to be eligible for a donation deduction. 

An independent expert must appraise the property before donation to a qualifying organization. For the donation to be valid, it is crucial to have a formal gift agreement that documents all the details. While gifting property can be a wise move for passing on a valuable asset to your kids, you must consider their future income prospects. If they are going to become wealthy, it might be beneficial for them to sell and take advantage of the capital gains tax exclusion.

Lastly, private foundations can provide greater control over philanthropic giving but are subject to more complex tax rules and regulations. They must make a certain amount of charitable distributions yearly, typically 5% of their assets. They're subject to a "self-dealing" rule prohibiting them from engaging in transactions with disqualified persons, like foundation trustees or their family members. 

They must ensure their investments are consistent with their charitable purposes, maintain proper records, and comply with various disclosure and reporting requirements. And they're generally subject to a higher excise tax than public charities.

A Charitable Remainder Trust (CRT) is a trust that allows you to donate appreciated assets, sell them, and avoid capital gains taxes. You receive a tax deduction for the total value of your donated assets, and you receive a lifetime income stream from the trust. The remaining assets go to the charity of your choice at the end of the trust term. However, CRTs can be complex and expensive to set up, and the income you receive may be taxed as ordinary income.

By naming a charity as a retirement account beneficiary, you can leave a valuable legacy and reduce taxes. The charity receives the gift tax-free, and the donation can reduce the taxes owed on your estate. It's an easy way to ensure that a portion of your estate goes to a cause you care about. You can also avoid probate, which can be expensive and time-consuming for your heirs.

Funding a Roth IRA can teach the recipient the lesson of compounding interest. You can set up a Roth IRA as a gift for someone else, such as a child or grandchild. The recipient needs to have earned income to be eligible to contribute. The contribution limit for a Roth IRA in 2024 is $7,000, or $8,000 if they're over 50. The gift counts as a gift to the recipient and eats into your annual gift tax exclusion ($18,000 in 2024) or your lifetime gift and estate tax exemption ($13.61 million in 2024). Once it's set up, the recipient will have complete control over the Roth IRA.

Due to tax regulations, individuals with particular retirement accounts must withdraw a minimum each year. Required Minimum Distributions (RMDs) are mandatory withdrawals taxed as ordinary income. One way to reduce or eliminate taxes on these distributions is through a Qualified Charitable Distribution (QCD). 

Instead of taking the money as an RMD, you can designate a charitable organization to receive the money directly from your IRA. You must be at least 70.5 years old to make a qualified charitable distribution (QCD) from your traditional IRA. You cannot use funds from a 401(k) or other employer-sponsored plan for a QCD. Additionally, you’re limited to gifting $100,000 per year per person.

Consider charitable “bunching” to maximize taxes. Due to the increased standard deduction, many smaller gifts may not yield any tax advantages since the standard deduction often exceeds the deduction for charitable gifts. To address this issue, it often makes sense for investors to consolidate 3-5 years' worth of gifts into a single year (a practice known as "bunching"). During years when donations aren’t made, you can stick with the standard deduction.

Up Next: In Part 3 of our Tax Smart Philanthropy series, we’ll be diving into how partnering with a financial planning team can help you take your charitable giving strategy to the next level. Click here to read more.

Always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any rates of return are historical or hypothetical in nature and are not a guarantee of future returns, which may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions and security positions, when sold, may be worth less or more than their original cost.