Charitable Gifting to Lower Your Taxes

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Many like to consider charitable gifting to support their favorite organizations around the holidays. These meaningful gifts can also provide the donor with tax benefits in the forms of reduced taxable income or increased itemized deductions, ultimately lowering their tax expenses.

Direct Gifting

Direct gifting of cash is the easiest way to donate, but you must itemize your taxes to be able to deduct your charitable gifts. In 2023, the standard deduction is $13,850 for single filers and $27,700 for those filing married filing jointly.  An alternative may be to directly gift appreciated stock. When donating equities, the donor is able to deduct the market value of the shares, and you are not required to pay tax on the appreciation or gains. Securities must have been held for greater than one year to qualify for this tax benefit.

Qualified Charitable Distributions (QCDs)

People with pre-tax retirement accounts such as 401(k)s, 403(b)s, Individual Retirement Accounts (IRAs) and so forth, are required by the IRS to take a Required Minimum Distribution (RMD) once they reach age 73 under the SECURE Act 2.0. The RMD is taxed to the account owner as earned income for the year.  Those who have sufficient cash flow and are charitably inclined can fulfill the IRS mandated RMD and lower their taxable income at the same time, utilizing a Qualified Charitable Distribution (QCD). A QCD is a direct transfer of retirement account assets to a qualified charitable organization of your choice. The donation fulfills your RMD, and the distribution is not taxed to you or the receiving organization, skipping a whole layer of taxation. You are not required to donate your entire RMD. You can donate a portion of your RMD, and you have the option of donating to as many organizations as you like, so long as those are qualified 501(c)3 organizations. IRA owners can take advantage of the QCD provision once they reach age 70½  even though they are not required to take RMDs until they reach age 73.

Donor Advised Funds (DAF)

A Donor Advised Fund is a charitable gifting investment account, managed by a third party on behalf of a family, individual or an organization. You can gift various kinds of assets into a DAF, such as appreciated stocks, or less liquid assets like Real Estate Investment Trusts (REITs).  These investments continue to grow in value inside the DAF tax-free to you. You have the flexibility to gift from the DAF to several different non-profit organizations over your lifetime. The biggest benefit to utilizing a DAF is that you get the tax benefit up-front in the year you donate the asset. However, the asset can continue to grow inside the DAF for many years potentially extending your gifting power in the event the asset within the DAF appreciates. The downside of a DAF is the necessary administrative assistance and fees to manage the investment.

These are just a few of the many charitable gifting options that may fulfill you gifting intentions or tax deduction needs. If these are of interest to you, plan early by reaching out to your Certified Financial Planner™ or CPA now so you can complete these transactions before year-end.

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