How Philanthropy Can Benefit the Nonprofits You Support and Lessen Your Tax Burden
As the COVID-19 pandemic continues to impact countries across the globe and new variants are still emerging, many individuals are rethinking their giving priorities this year. Early in the pandemic, many increased their charitable giving to support relief efforts across the nation. Now, after seeing the pandemic’s effects on their local communities, many individuals are looking for additional ways to help as the pandemic becomes part of everyday life.
As we move ahead in 2022, the Required Minimum Distribution (RMD) from retirement accounts will continue to make Qualified Charitable Distributions (QCDs) an attractive tax saving strategy. It will be critical to take a fresh look at the role charitable giving plays in your tax planning. Below are three tax considerations to keep in mind when discussing charitable giving with your financial planner.
Cash Donations Aren’t Always King
Charitable giving doesn’t have to be synonymous with only cash donations, and the strategy you pursue can significantly impact your tax responsibility. Taxpayers who have held highly appreciated stocks for more than a year in non-retirement accounts can donate these long-term appreciated securities to charities and receive a double tax benefit. Taxpayers who itemize can receive a charitable deduction on Schedule A for the fair market value of the security gifted and avoid paying capital gains tax on the income.
When planning your philanthropic donations with your financial advisor, think outside the box and consider your full portfolio of assets. There may be a way to support causes you are passionate about and reduce your taxes in the process.
A Donor-Advised Fund Can Be a Win-win for Philanthropy and Tax Savings
One of the most popular tax saving strategies is also one of the best ways to maximize your philanthropic impact. Donor-Advised Funds (DAFs) allow charitably inclined taxpayers to give strategically by investing and growing assets that can be donated to any 501(c)(3) in good standing with the IRS at any time.
Taxpayers with DAFs are able to take a charitable giving tax deduction at the time of contribution of cash, securities or other complex assets. Beyond the ability to grow the account to increase the amount that can be given, DAFs are a proven, flexible giving vehicle that allow donors to support charities by contributing assets other than cash that, in many cases, a charity would not be able to directly accept and liquidate to support their missions.
Qualified Charitable Distributions Remain a Good Option
Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), one of the smartest charitable giving strategies was donating appreciated assets. However, the TCJA increased the standard deduction for taxpayers and eliminated or capped many popular itemized deductions. These changes significantly increased the value of QCDs. Because QCDs are not counted towards adjusted gross income (AGI), they provide several tax benefits while also being able to support charities.
QCDs can be applied toward RMDs, so if you are required to pull from your IRA, you can use that money (up to $100,000 annually) to support charities of your choice and realize tax savings. To qualify for a QCD, contributions must be made directly from an IRA to the charity and cannot be donated to DAFs, private foundations or other grant-making institutions.
Your Partner in Tax Planning and Philanthropy
Navigating taxes and your philanthropic plan is personal. And it can be very complicated. To help, Wescott’s Tax Alpha Group developed the 2022 Tax Strategy Guide to provide insight and guidance from our top Philadelphia financial advisors to help our clients understand complex tax topics, including how to make the most of their philanthropic efforts.
As we move forward in 2022 and are still dealing with the realities of a global pandemic and the anticipation of potential fiscal policy changes, we invite you to meet with our advisors today to make your plan for tomorrow. As fiduciary financial advisors, we are fee-only counselors who are committed to working in your best interest and can help you plan and implement your philanthropic legacy, while simultaneously helping you determine how you can save money on taxes.
We take seriously our role in helping clients make fiscally sound decisions, and we’re honored to be a Barron’s Top Advisor.
Download our free tax strategy guide for tips.