Making the Most of Charitable Giving Before and After Retirement
How to best give to a charity like Giving Center, in a tax-smart way could depend on your age. Donor-advised funds and QCDs are two different methods to consider that can still deliver tax savings, even with today’s higher standard deductions.
Charitable giving provides families with an opportunity to build a legacy and meaningfully impact the causes most important to them, but effective charitable giving requires a smart strategy. When and how you give makes all the difference.
Effective tax planning can ensure a larger portion of your donation goes toward moving the needle on the philanthropic priorities that matter most to you and your family. The right approach can be a win-win for both donors and causes.
With these shifts in mind, here’s a fresh look at the most effective ways to give before and after retirement, as well as the role a trusted adviser can play in helping you realize your charitable giving goals and execute a smart tax and estate planning strategy.
A HIGHER STANDARD DEDUCTION SHIFTS CHARITABLE GIVING TAX STRATEGIES
Of the many sweeping changes included in the TCJA, the increase in the standard deduction to $24,400 for couples stands to have the biggest impact on charitable giving and tax planning. What’s more, the tax law caps state and local tax deductions at $10,000 and eliminates other itemized deductions.
The cumulative effect of these changes is that many more families will take the standard deduction. In fact, the Urban-Brookings Tax Policy Center estimates the TCJA will cut the number of high-income households taking a deduction for charitable gifts by more than half. That means fewer families will qualify for tax benefits from cash donations. Fortunately, there are other charitable giving strategies that preserve the tax benefits. These strategies depend on your age and whether or not you’re required to take distributions from an Individual Retirement Account (IRA) or employer sponsored 401(k).
STRATEGIES FOR DONORS YOUNGER THAN 70½
Appreciated securities remain a powerful philanthropic tool for donors. By gifting stocks held for more than a year that have appreciated in value directly to a charitable organization, donors can exclude the capital gain income they would be required to pay if they sold the stock themselves. They can also deduct the fair market value of the stock if they are itemizing deductions and not taking the standard deduction. These two advantages make appreciated securities a superior option to donating cash.
Another option for donors is to donate the appreciated securities directly to a donor-advised fund (DAF). With a DAF, donors gift assets to the fund and receive the tax benefit at that time. The assets will continue to grow while they’re in the fund, giving donors the ability and flexibility to grant charitable organizations monetary donations over a period of time. Assets eligible to be donated to a DAF most commonly include appreciated securities or cash, although cash is not recommended for tax purposes. However, certain DAF administrators also accept complex or non-publicly traded assets, including closely held stock (Limited Liability interests, private C- or S-Corp stock), land, life insurance, real estate, hedge fund interests and even artwork.
Here’s a scenario illustrating how a DAF can benefit a donor. Let’s say you plan to donate $10,000 a year over the next five years but have the $50,000 right now. You can place it in a DAF in year one and receive the tax benefit beyond the standard deduction that year. You can then grant $10,000 from the DAF over the next five years. What’s more, the assets will continue to grow in value with the market while they’re in the DAF.