Charitable giving
Tanya Steinhofer No Comments

Year end is the time many people focus on charitable giving, probably partly due to tax planning, but also as a reflection of the gratitude during the Season of Giving. Two ideas I like to share with clients, if appropriate, are the concept of a donor-advised fund and the Qualified Direct Charitable Rollover from a retirement account.

A donor-advised fund is a charitable account to which you can make a lump sum donation, but then gift it out to charities over as many years as you wish. You receive a tax deduction in the year of the original lump sum donation, so it can make sense to fund a donor-advised fund in high income years and then use it to make charitable donations in lower income years or even in retirement. You can reap further tax advantages by donating investments with large long-term gains in them. Not only do you get the tax deduction for the value of the gifted investment (subject to some income limits), but you remove a large taxable capital gain from your portfolio. This strategy is particularly appealing now, after years of strong market appreciation for US stocks. This strategy is particularly valuable for charitably inclined people in their peak earning years or with an unusually high-income year.

Another strategy for people who are over 70 ½ and required to take minimum distributions from their retirement accounts, is to donate this distribution directly to a charity of their choice using a Qualified Direct Charitable Rollover. This strategy is better than just donating money to a charity after taking the distribution out of the account because it reduces adjusted gross income, instead of being taken as an itemized deduction, which might be subject to income phase-outs. Lowering adjusted gross income can also help reduce the odds of higher Medicare premiums. This strategy is subject to several rules, so it’s always a good idea to consult with a tax professional if you think a particular tax strategy might be appropriate.

Turbo charging your charitable giving with one of these strategies (if appropriate) can help maximize the impact of your giving, while reaping tax benefits for you. It’s always best to consult with a financial planner and tax professional to determine if either of these strategies might be appropriate for you.