Giving is important to all of us, it is the way that we see our hard work and good fortune make a difference in this world. Naturally, we want to give as much as we can, and that means being tax conscious. Many clients come to us unable to write off donations due to the high standard deduction. They give but have no way of realizing a tax benefit from doing so.
However, there are ways that clients can see tax savings without drastically changing their gifting strategy. We advise our clients to think of how they are donating, instead of what. Below are a few tips that have been most helpful in saving our clients tax dollars. Please feel free to share this, and call if you would like to discuss your own strategy.
Qualified Charitable Distributions
If you are taking money out of an IRA and are over the age of 70 ½ then you have more options than you may know. Most people will take what they need out of their IRA, then use their checking account for expenditures, even for donations. A simple strategy change here can save you immediately on your taxes.
A Qualified Charitable Distribution is when you take money out of your IRA in the name of the charity, cutting out your checking account and sending money directly to the cause of your choice. The benefit of doing this is that the money does not get counted towards your income if done properly, meaning you do not get taxed.
You can even use this strategy to take RMDs. The limit is $100k a year, and you must be over 70 ½ to participate in this strategy. You can find more about this strategy here.
Charitable Clumping
Sometimes giving every year is not the most efficient way to give. If you have the money to give to a cause every year, Charitable Clumping may be a solution. With this strategy, you give everything you intend to give over several years in one year. The benefit to the charity is a large donation, and because you are giving so much you are more likely to give beyond the standard deduction.
This strategy is best in years where you feel you will have other larger itemized deductions, like medical bills, mortgages, etc. The closer you are to the standard deduction limit, the more this strategy will save you.
Donor Advised Funds
Let’s say you have a large savings account dedicated solely to giving, or maybe your financial plan says your savings account is too large and you are looking for a place to invest it. A Donor Advised fund is a type of irrevocable trust that acts like a charity. Every dollar you put into it is treated as a donation for tax purposes, and you still retain control of it (though you do not retain ownership).
Donor Advised Funds are popular for people with a lot to give who want to take a large deduction in high income years, but still want to give on an annual basis. Donations can be sent straight from the Fund to a charity of your choice in any amount you choose.
Regardless of how you give, it is important to have a plan for your retirement. This plan includes assessment of taxes, investments, estate plans, insurance, and income planning. If you do not already have a plan, feel free to reach out to us to discuss how a plan might assist you in retirement.