Video: Optimizing Strategies for Tax-Effective Charitable Giving August 10, 2021
Optimizing Strategies for Tax-Effective Charitable Giving
“No one has ever become poor by giving.” That is a very powerful quote by none other than Anne Frank.
Hello, this is Blaine Carr with Petersen Hastings. Most Americans have the wherewithal to help fund a variety of good causes. I firmly believe, as stated in the Book of Luke, “From everyone who has been given much, much will be demanded.” Motive for giving matters. Each of us should give because we want to, not to get something in return. However, once your decision is made to give, you might as well execute in the most advantageous way to you and the organization.
Traditionally, most charitable gifts are made via cash, check, or credit card. If you itemize your personal deductions, you generally get a tax deduction for the full amount of the gift to a qualified charity. This sounds easy, but there might be a better way to make the gift.
If you own assets which you have held for more than a year, and which have appreciated in value, you should consider gifting these assets to charity rather than the equivalent amount in cash. Examples of appreciated assets include stocks, mutual funds, and real estate. If you were to sell an appreciated asset you would likely incur tax on the capital gain, based on the amount you sold the asset for less what you paid for it. The capital gains tax rate is 15%, or higher. When you gift the appreciated asset to charity neither you nor the charity incurs a capital gains tax, and you still get a deduction for your taxes. This sounds like a much better option, but you need to make sure the charity wants the asset. I’ve seen a charity end up with unusable land, which it had to pay property taxes and other maintenance on. That is the type of situation you should avoid.
Another great way to give is through your Traditional IRA. If you are at least 70 ½ you can give up to $100k per year from your IRA directly to a qualified charity and not be taxed on the distribution. This is known as a Qualified Charitable Distribution, and it counts towards the annual Required Minimum Distribution from your IRA. You don’t take the tax deduction on a QCD with other itemized deductions because you are not taxed on the QCD when it comes out of your IRA. I highly recommend giving in this manner, even if you are already itemizing your deductions. While your tax impact might be the same either way, I haven’t seen anyone come out better by gifting with cash than with their IRA. There are two main reasons for this. First, a QCD reduces your Adjusted Gross Income, not just your taxable income. This could be a benefit when it comes to the rate of your Medicare premiums or how other AGI-based tax provisions affect you. Second, many taxpayers are not itemizing deductions due the high standard deduction amounts our current tax code allows. A QCD gift often equates to a tax deduction on top of the standard deduction. Please make sure you follow the process your IRA custodian has if you would like to make gifts by QCD.
You can also check out the bunching technique I covered in my last video. In short, you can increase your tax deductions by bunching charitable deductions and other itemized deductions from multiple tax years into fewer years. You then itemize some years and take the standard deduction in other years. This takes some proactive planning, but you could end up with higher deductions over the entire period.
Giving to charity is good. Giving to charity in the most tax efficient manner is even better. This can be done by gifting appreciated assets, direct gifts from your IRA to charity, or by bunching your tax deductions. Hey, maybe you’ll even choose to give some of your additional tax savings to your favorite charity.
Thank you for tuning in. You should check with your tax advisor before you implement any of the strategies covered in this video. Please share this video with your friends and family. I encourage you to reach out to us at Petersen Hastings if you would like more information on charitable giving. Tune in next time I will cover the new WA long-term care plan.