Charitable Giving and Taxes | Financial Planning Guide

Making the Most of Your Charitable Giving

Americans gave a record $471 billion to charities in 2020, according to the latest data available. But how many considered maximizing their tax savings as they made their gifts?

We believe charitable giving and a personalized tax strategy go hand-in-hand. For that reason, the Adviser
Investments financial planning team is always happy to review the tax implications of any philanthropic plan our clients wish to implement.

Three main benefits to planning ahead:

  • Maximizing Your Impact. Developing a charitable plan, rather than following a one-off gifting approach, can increase your giving and reduce your taxes.
  • Building Your Legacy. Involving your family in your philanthropy early can build a legacy of giving for generations to come.
  • Giving Wisely. Evaluating charities ahead of time will lead to more educated, impactful giving over time.

Deciding on the best way to give doesn’t have to be a challenge, but it can be. At Adviser Investments, we work with you to discuss your giving options and determine what’s best suited to your goals. Here are some strategies for getting the most out of your charitable giving.

Five Common Giving Strategies

1. DONOR-ADVISED FUND (DAF)

If you’ve ever wanted to run your own charitable foundation without the administrative hassles, a DAF may be for you.

Anyone can create a charitable account through a DAF offered by custodians like Fidelity or Vanguard. This arrangement allows you to donate cash, mutual fund and ETF shares, stocks and even complex assets like real estate or private interests for an immediate tax deduction in the year of your gift. With a DAF, though, you don’t have to start making donations to charities right away. Instead, your contributions are invested in a portfolio (typically mutual funds) of your choice, and they grow tax-deferred until you recommend a gift or a series of gifts to any number of charities.

DAFs are simple to set up and inexpensive to maintain, unlike private foundations. Once you take the deduction for the gift, you don’t have to worry about any further tax reporting. Most custodians will also allow you to name successors to carry on your charitable giving. DAFs are becoming more popular given the higher standard deductions that went into effect with the 2018 tax law changes. Increasing numbers of donors are using “bunching” to make several years’ worth of donations to a DAF at once, allowing them to itemize their taxes for maximum savings.

2. QUALIFIED CHARITABLE DISTRIBUTION (QCD)

If you have a traditional individual retirement account (IRA), you can use it to make charitable contributions while reducing your tax liabilities as soon as you turn age 70½. And the year following your 72nd birthday, you can make charitable gifts directly from your IRA while satisfying your required minimum distributions (RMDs).

Here’s how it works: Once you begin taking your RMDs from a traditional IRA, you can direct them to a qualified 501(c)(3) charity (but not a DAF) rather than receive them as taxable income. If you do that, the QCD is not reported as income on your tax return. The savings can be significant, and instead of taxes reducing the value of your distribution, the entire amount goes to the charity of your choice.

Charitable giving and taxes from IRA

3. DIRECT GIFTS OF APPRECIATED SECURITIES

Did you know that you can donate securities like stocks, bonds or mutual funds instead of cash?

You can, and giving securities that have large embedded capital gains allows you to avoid taxes while still receiving a deduction for the security’s fair market value—gifting a security that’s appreciated significantly creates the greatest tax savings. It also means the charity gets the full value of your donation, since transfer or gift taxes do not apply. Depending on the size of your estate, this method may also reduce your estate taxes down the road.

The table below gives a hypothetical breakdown of the potential savings for these kinds of gifts.


4. SPLIT-INTEREST CHARITABLE TRUSTS

If you want to give some of your assets to a charity and reserve some for yourself or an heir, this species of trust could be appealing.

Split-interest charitable trusts are irrevocable trusts with two beneficiaries: One charitable and one non-charitable (such as the donor or heirs). One beneficiary is “paid first” and receives income payments from the trust over a period of time; the other beneficiary receives the assets remaining in the trust at the end of the predetermined distribution period.

Charitable lead trusts (charity paid first) and charitable remainder trusts (other beneficiary paid first) are two common types of split-interest trusts. A gift to either type is irrevocable and can provide you with an immediate tax deduction.

5. PRIVATE FOUNDATIONS

Some people prefer to establish their own charitable foundations. Private foundations provide greater flexibility and control than a DAF, as they can make charitable gifts to both private and public charities as well as individuals.

The drawbacks to this option include higher costs for management and tax reporting, required minimum charitable distributions based on the trust’s size, and a 1.39% excise tax on any net investment income. Plus, private foundations may not be able to take income tax deductions.

A Charitable Strategy That’s Right For You

Just as every donor has their own charitable intentions, each also has different needs when it comes to charitable giving. Some of the strategies mentioned above sound simple but can be quite complex to implement. Others are simpler but may not provide the flexibility you desire. Working with a trusted wealth manager can help you maximize your giving impact while making smart tax decisions. The team at Adviser Investments has worked with many clients over the years to build their charitable legacies and we stand ready to help you put your personal philanthropic plan into action.

This material is distributed for informational purposes only and is not financial or investment advice. Speak to your financial adviser before taking specific action. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

All investments carry risk of loss and there is no guarantee that investment objectives will be achieved. Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

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