High-net-worth retirees have so many opportunities to make a difference in the world with their funds, and fortunately for both donors and charities, that generosity can also be beneficial for your bottom line when tax time rolls around.
However, not all giving strategies are equal. If you’re looking for ways to include charitable giving in your estate plan, Magellan is here to share some tax-efficient charitable giving strategies to consider.
This list moves from the least tax-efficient ways of giving to more advanced strategies that allow you to save more on taxes. Move beyond basic strategies with this comprehensive guide to some of the best moves out there.
Basic Strategy: Gifting Cash
The first and most obvious way to contribute to charity is simply to write a check. When you give cash, it takes very little planning and only requires you to keep a receipt to claim money on your tax deductions at the year’s end.
It’s worth emphasizing that this method only gives you a tax benefit if you itemize your deductions. If you do not itemize your deductions, this giving might be lost in a sea of other expenses.
The other drawback to gifting cash is that you are giving away post-tax dollars. Your gift could go much further with pre-tax dollars, allowing the charity you choose to spend more and invest in something that would have a greater impact.
Intermediate Strategy: Gifting Appreciated Stock
Moving past cash donations, you get double the benefit if you give a charity some appreciated stock. First, you get a fair-market-value deduction for the stock you contribute to charity. Second, you avoid capital gains tax on the difference between the purchase price and the current value. It could be a win-win for everyone involved.
Gifting appreciated stock could even be better than a QCD if you have stock with a near zero cost basis and you itemize.
Advanced Strategy: Gifting from Your IRA (The QCD)
Up to a certain amount indexed for inflation, you can contribute money to charity directly from your IRA with a Qualified Charitable Distribution (QCD). IRA distributions are taxed as ordinary income – the highest rate schedule.
A QCD is an exclusion from your annual income rather than a deduction. If you choose to take the standard deduction on your taxes, this is the only method that provides a benefit to you.
The QCD is also the key to managing your adjusted gross income, which in turn can lower your Medicare premiums under the Income-Related Monthly Adjustment Amount (IRMAA).
Master Strategy: Gifting Complex or Illiquid Assets
Last but not least, you can give charities the benefit of more complex assets or illiquid ones. Before you sell them,donate them to a donor-advised fund or a charitable remainder trust. Then, you can sell them and avoid massive capital gains taxes on the profits of the sale. This method will also provide a huge deduction to offset other income.
The benefits of a charitable remainder trust are numerous. It provides income for your beneficiary and allows you to give back to a charity of your choice. It removes assets from your taxable estate and places them in an irrevocable trust, where your beneficiaries can access that income source with increased privacy from probate.
Example Scenarios
How do you know which of these strategies is going to be the right fit for you? Here are some of the most common situations we encounter at Magellan, along with the solutions for each.
Scenario A: “I Don’t Plan to Itemize My Deductions.”
Unfortunately, most giving strategies that allow you to reap tax benefits require you to itemize deductions on your tax returns. If you do not plan to itemize, the QCD may be your primary tool. Gifting appreciated stock gives you no tax benefit, but the QCD gives you a direct, dollar-for-dollar reduction of your taxable RMD.
Scenario B: “I Have a Very Large, Highly-Appreciated Stock Position.”
Consider a donor-advised fund (DAF). With this strategy, you can “bunch” five to ten years of your giving into one year simply by donating the stock. This clears the high-appreciation and high-risk position from your portfolio. Meanwhile, it also allows you to avoid capital gains taxes and provides a substantial itemized deduction.
Scenario C: “I Want to Give, but I Also Need Income.”
A charitable remainder trust (CRT) can convert a non-income-producing, appreciated asset into a new source of lifetime income. Think about assets like land or concentrated stock that you could donate to the CRT. You get a current tax deduction and leave a legacy for beneficiaries and the charity that you hold near and dear to your heart.
Consult Magellan for More Strategies
These are some of the basic to advanced charitable giving strategies that will help you to be more tax-efficient at the end of the year. High-net-worth retirees have unique needs for their taxes, and Magellan understands all of them. Regardless of your situation, we have a solution to help you make a positive impact on charity and reduce your tax burden.
Magellan provides comprehensive estate, financial, legal, and tax planning services to our clients, with an emphasis on creating and managing charitable remainder trusts.
If you think this strategy might be the right fit for you, contact us today for a consultation where we will review your unique positions!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group.