7 Charitable Giving Strategies to Maximize Your Legacy
Donating to charity has a host of benefits. You get to support the causes you’re passionate about, it makes you happier, and it inspires others to be generous. But there’s also a major financial advantage to charitable giving: It can help lower your income and estate taxes.
As a fee only financial advisory firm, Paradigm Financial Advisors helps our clients establish their charitable giving plans so they can reap as many benefits as possible, both emotionally and financially.
Below are 7 strategies you can use to maximize your charitable donations now (while you’re living) and in the future (as part of your estate plan).
Charitable Giving While Living
Want to start making sizable charitable donations during your lifetime? There are different strategies you can use to maximize your gift and lower your taxes at the same time.
Strategy 1: Bunching Charitable Donations
If you typically donate $10,000 to charity a year, you may consider donating $30,000 every three years. The goal here is to get enough deductions on your Schedule A to utilize the itemized deduction schedule versus just taking the standard deduction.
For example, let’s say you’re married filing jointly. Your standard deduction is $24,400. Each year, you claim $25,000 in itemized deductions ($10,000 for state and local taxes, $5,000 for mortgage interest and $10,000 for charitable donations). If you’re in a 35 percent tax bracket, your donations end up saving you about $210 in taxes each year ($630 over a three-year period).
If you were to bunch your charitable donations and give $30,000 every three years, you’d save $7,210 in taxes over a three-year period (assuming a 35 percent tax bracket). The amount you’re ultimately donating is the same, but it results in $6,580 more in tax savings than if you were to break it up and give $10,000 each year.
Strategy 2: Donor-Advised Funds
Think of a donor-advised fund like a savings account just for charitable giving. You place your cash, stocks or other assets in the account and receive an immediate tax break. Then you get to decide how the funds are used over time. You can recommend grants to qualified charities while you’re alive, or you can invest the funds and have them distributed to charitable beneficiaries upon your death. The deduction rules are the same for the year the account is funded and are subject to the same thresholds for qualifying for a deduction as a direct gift to charity.
Strategy 3: Qualified Charitable Distributions (QCDs)
A Required Minimum Distribution (RMD) is the minimum amount that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 72 (70-½ if you reached age 70-½ before January 1, 2020). Not taking these withdrawals can result in hefty penalties. Taking them can put you in a higher tax bracket.
One way to avoid this is to donate all or part of your RMD to a qualified charity. QCDs don’t count toward your taxable income for the year, which means you’ll receive a tax benefit without having to take the itemized deduction.
You can gift up to $100,000 of your RMD each year to charity.
Charitable Giving as Part of Your Estate Plan
Another option is to build charitable giving into your estate plan. As a fee-only financial advisory firm, Paradigm Financial Advisors also helps our clients protect their assets when they’re gone. There are several ways you can do this.
Strategy 1: Gift an Annuity
Charitable gift annuities can be an effective strategy for those who want to have guaranteed income for life but still support an organization they care about. It’s essentially a contract that pays you a fixed income stream for life in exchange for making a sizable donation to a charity. You also get to deduct part of the donation from your taxes in the year you set it up.
Strategy 2: Establish a Charitable Trust
There are 2 main types of charitable trusts: A Charitable Remainder Trust (CRT) and a Charitable Lead Trust (CLT).
A CRT works similarly to an annuity. You place your money in an irrevocable trust and receive a percentage of income from it for a set number of years. Once that time frame is up, the remainder of the money is donated to the charities of your choice.
With a CLT, the charity receives a steady stream of income first. Then, the remaining assets are given to the donor’s family members. It works the opposite of a CRT and is mainly used by ultra-high-net-worth individuals who are concerned about owing estate taxes.
Strategy 3: Gift Appreciated Assets
You can gift appreciated real estate, stocks or other securities while you’re alive or upon your death. The main benefit to this is that you avoid paying capital gains taxes on those donations, which means the charity ends up with more money. Note, the charity does not have to realize the capital gain either.
Here’s an example of what this looks like:
Let’s say you’re in the 15 percent capital gains tax bracket. You bought stock in 2005 for $5,000. Today, it’s worth $25,000. If you sold the stock first and then donated the money, you’d pay $3,000 in capital gains taxes. The charity would get $22,000. But if you transferred the stock directly to the charity, they’d get the full $25,000.
Strategy 4: Start a Family Foundation
If you have an ultra-high net-worth, starting a family foundation can be an effective way to reduce the size of your estate. It’s also a great way to get the family involved on your philanthropic endeavors. However, private foundations often have strict regulations to follow. Make sure your family is up to the task of carrying on your legacy before you set one up.
Tax Considerations to Keep in Mind
There are 2 main tax considerations to keep in mind before you donate to charity.
First, you must donate to a legit charity to get a tax break. Because of this, it’s important to research organizations before you make a donation. They’ll most likely need to be classified as a 501(c)(3) organization. You can check if an organization is tax-exempt by looking it up in the IRS database.
Second, you must take the itemized deduction to get a tax break.
Your charitable donations are tax-deductible, but only if you itemize your taxes. Your total itemized deductions need to exceed the standard deduction before you will receive any economic benefit from your charitable contribution.
For 2020, the standard deduction is $12,400 if you file a single return, $18,650 for heads of households and $24,800 for married couples filing jointly.
Summary of Charitable Giving Strategies
This table gives a quick comparison of all the charitable giving strategies discussed above. Feel free to use it as a guide when deciding which strategies are right for you. To learn more about a specific strategy or to discuss how each approach affects your specific situation and financial plan, contact Paradigm Financial Advisors and let us help you. We are a fee only financial advisory firm in the St. Louis area and specialize in charitable planning.
The Right Strategy for You
The type of charitable giving that will work best for you depends on your estate, the amount of money you want to donate and how you want to give it. Depending on your situation, there may be even more strategies you can use to maximize your charitable contributions that we didn’t cover here.
If you’d like help making the most of your generous giving, we at Paradigm Financial Advisors would love to help you strategize a plan. Contact us to get started.