There are so many ways you can change a child’s life forever. When you give a gift to AGCI, you can trust your gift truly benefits children and families in most desperate need. We chatted with Adam Todd, CFP®, a managing partner and senior adviser for a wealth advisory business and AGCI Board Member, about different, tax-smart ways you can give and change lives!
Here are Adam’s top tax-smart strategies for charitable giving.
1. Use a donor-advised fund as a platform for giving
A donor-advised fund (DAF) is a great tax saving alternative to giving to charities directly or establishing a foundation. It’s simple to establish and a great way to implement any of the strategies listed below. Most major financial institutions, i.e. Fidelity, Charles Schwab, Vanguard, etc., have great DAF resources to help you set one up. Here is how it works. After it’s established, you make contributions to the DAF with cash or other assets. Because the DAF is a non-profit, you receive a full charitable deduction at the time of the contribution. The donor can then “advise” the fund on when to distribute money as grants to other non-profits. This is not a savings account—contributions to your donor-advised fund are gifts and irrevocable, but you do not need to distribute the money immediately. The donor can also advise the fund on how to invest the money before it is given to other non-profits. This allows your giving power to grow, without paying taxes or limiting your ability to give to charities just at year-end. A big advantage to using a DAF is that it can act like a conduit or hub in combination with other strategies mentioned below making your giving easier and tax efficient.
2. Give appreciated non-cash assets instead of cash
Adam likes to say, “Friends don’t let friends give cash.” When donors give appreciated publicly traded securities, such as stocks, bonds, mutual funds, or ETFs, that have been held for more than one year, capital gains taxes can be avoided. You give the security directly to your DAF or to a charity, and you get a tax deduction for the full value of the asset on the day it is transferred. The DAF or charity sells the security, and as a non-profit, they do not owe any tax on the transaction. Eliminating the capital gains tax can increase the amount available for charitable giving by up to 20%. This strategy is one of the easiest and sure fire ways to amplify your giving.
3. Give a percentage of a privately held business or real estate interests
If you own your own business or investment real estate, this can be a powerful tool especially if you plan to make charitable gifts after you sell. Similar to #2 above, you can give away shares or interest in private investments. The technique is the same meaning you must give away some ownership before you sell, and the end result is the same. You get a tax deduction for the full value of the gift, and after a transaction, the charity or DAF does not owe taxes on their share of the proceeds. The tax savings can be substantial. Please note there are some additional steps and details due to the private nature of the transaction, so you will want some legal advice before proceeding. If you have a DAF, your financial institution or adviser probably have resources to help.
4. Offset tax liability when withdrawing from a retirement account
When donors withdraw from an IRA, that’s taxable income. If a donor is planning to give a gift to charity, they can reduce taxable income by giving directly from their IRA. To avoid an early withdrawal penalty, this strategy can be used by donors over 59 ½. While this doesn’t allow for a deduction, it reduces a donor’s taxable income.
5. Make use of an IRA required minimum distribution through a non-taxable qualified charitable distribution
At a certain age somewhere around 72, you must start making Required Minimum Distributions (RMDs) from your IRAs and qualified accounts. These distributions are taxable income. For many seniors, this additional income will not only increase income taxes, but it can also cause increases on Medicare and Social Security taxes. Instead of taking all the RMD as taxable income, there is an option of making qualified charitable distributions (QCDs) of up to $100,000 a year from their IRAs directly to non-profit organizations. This allows donors to reduce their taxable income while also satisfying all or part of their annual required minimum distribution. When a person must start making Required Minimum Distributions (RMDs) from an IRA got more complicated after Secure 2.0 legislation was passed. Consult a tax professional about your RMD age threshold.
These are just a few tax-smart ways to give to AGCI and change lives today! Questions? Reach out to us!