You Don’t Need to Be Wealthy to Take Advantage of These Charitable Giving Strategies

Makenzie Scott, the multi-billionaire ex-wife of Jeff Bezos, has donated billions of dollars to charities and causes with plans to give away much more. She is a philanthropic powerhouse with the means and desire to help other people, and that’s to be admired. Most people don’t have millions or billions to give away. But they are very much charitably inclined, seeking to make a difference by helping others however they can. If they can do so while also improving their own financial situation, then so much the better.

A well-conceived charitable giving strategy can help anyone with philanthropic desires to maximize their capacity to give by targeting specific tax breaks offered through the tax code. Here are three strategies that can benefit charitably minded people across the economic spectrum.

Qualified Charitable Deductions (QCDs)

For taxpayers aged 70½ or older, who no longer itemize deductions due to the expanded standard deduction, the QCD is a significant advantage. It can help lower your taxes by avoiding unwanted required minimum distributions (RMDs) from your IRA as well as the Income Related Monthly Adjusted Amount (IRMAA) assessment on your Medicare premiums.

QCD is a tax-free funds transfer from your IRA to a charitable organization. You must be at least 70½ to use it. You instruct your IRA custodian to issue a check of up to $100,000 made payable to a qualified charitable organization of your choice. You pay no taxes on the distribution, and it satisfies your RMD. And, because your RMD is removed from your adjusted gross income (AGI), it can help you avoid the dreaded IRMAA assessment.

Donor-Advised Funds

For people who want to make substantial donations to a few non-profits or those who want to make smaller donations to many non-profits, a donor-advised fund (DAF) is a smart, flexible, and cost-effective way to manage your philanthropy.

You can establish a DAF for as little as $5,000 with a custodian. It’s similar to an investment account you open with a financial advisor, except contributions are irrevocable. A DAF acts as a repository for all your charitable contributions until you decide when and to whom to make a gift. In the meantime, your contributions accumulate in an investment account. You receive a tax deduction in the year you make the contribution.

A DAF is also useful as a tool for charitable “clumping,” a strategy that helps taxpayers take advantage of charitable deductions by pushing their itemized deductions above the expanded standard deduction. See our article, Stack Up Charitable Giving for More Tax Impact, for more information on charitable clumping.

Donate Appreciated Securities

An effective way to maximize the value of your contributions is to donate shares of appreciated stock. Instead of writing a check to your favorite charity, you can donate shares of stock that have appreciated. You can deduct the share’s fair market value while avoiding capital gains taxes. The charity can sell the shares to raise funds without tax consequences.

For example, if you want to make a $15,000 contribution to the Make a Wish Foundation, you can give them 100 shares of Apple stock for which you paid $5,000. You receive a tax deduction for the entire $15,000. If you want to continue to own Apple stock, you can buy the stock at the current price, which is a higher cost basis. That way, you get the deduction while avoiding the capital gains tax on your original Apple shares if you had sold them instead.

There are a few rules that must be applied to ensure eligibility for the deduction:

• If you haven’t owned the stock for more than a year, you can only deduct your basis, not the current fair market value.
• The fair market value of your contribution is based on the average of the high and low prices for the stock the day it’s transferred.
• The IRS limits the deductibility of gifts of appreciated property to 30 percent of your AGI. Amounts that exceed that can be carried forward to future years.

Any of these strategies can be a boost to your philanthropic desires. However, because all these strategies have tax implications, it’s advisable to first consult with your tax advisor.