What to do with our money is often broken down into three categories: give, save, and spend so charitable giving is a topic that we discuss often with clients. Our role isn’t to decide when, why or how much they give, but to assist them in their planning and making sure their giving fits with their long-term family wealth and estate plan. When we connect our finances and our core values we are more satisfied with our growing wealth. While this is always true, we need to know how charitable giving affect taxes. A smart giving strategy may reduce taxes paid as well as allow you to give more to the causes you support.
Charitable Giving
Cash Flow Strategy
There is no right or wrong way to give; we balance our needs with our desire to help others. One tactic that we see used successfully is to set a specific target, either a dollar amount or percentage of income. If income is consistent, a dollar amount can work well, such as $500/month. Creating an account or sinking fund within your cash reserve that is earmarked for giving will separate the money and ensure it is not used for other purposes. If it goes into the charity bucket right away, it may feel less like “our” money and makes it easier to avoid using it for other purposes. This also helps if we are not sure where to donate it yet, so we can save up until we find worthy causes.
For those on a variable income, a percentage of take-home may be used. If charitable giving is new to you, begin with a modest amount and adjust over time. The purpose is simply to put you in control of how generous you are as the challenges of daily life take our focus. This can be monthly, quarterly, or even per paycheck. Often 10% is used, but your number can be personalized to your situation. The most important part is simply starting and doing something consistently.
Charitable Deductions 101
Most tax benefits from the IRS are available only when giving to recognized charitable organizations, recognized with the 501(c)3 designation. Charitable giving normally can be taken as a deduction or subtracted from income. Typically these deductions are only available if you itemize expenses. With some limited exceptions, choosing the standard deduction means charitable giving does not impact current year tax liability.
Note: 2022 Standard Deduction is $12,950 for single filers and $25,900 for Married, filing jointly. For 2021, The CARES Act provided a $300/taxpayer ($600 for couples filing jointly) of additional deduction above the standard deduction, but this has not been extended for 2022.
Giving Appreciated or Complex Assets
What type of property we choose to give can also impact our taxes. While cash is the most straightforward way to give, other assets, such as publicly traded securities or private business interests can be used. One reason to consider gifting appreciated assets, such as stocks or mutual funds is that the capital gains tax may be avoided, decreasing your tax burden and donating the full market value of the securities. Charities do not pay capital gains when they sell, so they get the full value. Capital gains tax is simply not paid. There are AGI limits for deductions for this deduction so everyone has a different maximum for gifting shares of appreciated securities. The gift must be taken from non-retirement accounts such as joint or individual brokerage accounts.
Here is an example. As you can see, if done correctly gifting appreciated securities can be a very tax-efficient way to give.
Donor Advised Fund (DAF)
A donor advised fund is a type of account that acts as a charity holding tank so that funds donated are do not have to be in the same year they are distributed to charities. When clients open a DAF through Raymond James Charitable, the account can be funded with cash or appreciated assets from an investment account. The amount of deduction allowed can be taken in the year the transfer takes place, and the money can be distributed in later years. This allows for gifting and tax flexibility and the potential for investment growth if the money is invested inside the DAF.
One example of how timing is important is the bunching strategy. Maybe you have a big income year by selling your share of a business or a real estate investment. The standard deduction for those married, filing jointly for 2022 is $25,900, but you typically give about $15,000 per year. This means that you gain no tax benefit from this giving. Say you funded your DAF with $50,000 in 2022 using either cash or deductible securities. You would be able to itemize and use the DAF contribution for a greater tax savings above the standard deduction. Then in 2023, you direct your DAF to give $15,000 to the same charities or religious organizations you typically do, taking the standard deduction for the year. Assuming a 24% federal rate, this would be a tax savings of $5,784 ($50,000 – 25,900 x 24%). The tax benefit could be even greater if you combine gifting appreciated securities, your tax rate is higher than 24% or you are subject to state income tax. Gifting from a DAF at Raymond James can be done in lump sum or in automatic installments.
There is no time requirement for distributing the funds from a DAF, so you could use this fund for several years of giving. If you give a big lump sum in 2022, you may avoid using your cash flow for giving for a year or two as you are directing the money from the fund. This bunching strategy can lower your taxes over a multi- year timeframe and make budgeting and tracking easier. Additionally, some clients choose to invest the funds in their DAF, gaining the possibility of tax-free market returns before the funds are distributed later. The execution can be tricky, so our team will typically help with guidance and administration.
Qualified Charitable Distributions (QCD)
A QCD allows those who have reached the age of 70 ½ to give directly from their IRA to charity, skipping the income entirely and avoiding having to take any kind of deduction. This can be especially useful if you do not need all of your pre-tax funds during their lifetime. When taking required minimum distributions (RMDs), it is possible to give some or all of the distribution as a QCD up to the limit of $100,000 per person per year. Certain kinds of charities, such as private foundations and the DAF, do not qualify. QCDs can be a used with the bunching strategy mentioned above, however, as they can be used with the standard deduction.
Other Planning Thoughts
While the urge to give is simple, the tax code can be complex. We are here to help clients with the details so that giving can help fulfill their values, while helping to execute a tax-efficient savings and wealth strategy.
The information contained in this email does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The opinions expressed here are those of and not necessarily Raymond James. Opinions are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we do not provide advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.