Charitable Contribution Strategies from a Financial Advisor

Nonprofits play a crucial role both locally and globally, aiding communities impacted by natural disasters, conflict, and economic challenges. Luckily, there are smart ways to support the causes you care about. These methods can also help your finances, no matter how the market changes.

Before you donate, take a look at these strategies to help maximize your impact.

Consider donating appreciated securities instead of cash

Cash donations are the most common way to give. However, donating long-term appreciated assets like stocks, bonds, or mutual funds is becoming more popular. This is for good reason.

You can often donate publicly traded securities directly to a qualified charity. If you hold the asset for more than a year, you can claim its fair market value on your federal tax return.

This applies only if you itemize your deductions. You may be able to deduct up to 30% of your adjusted gross income (AGI) for these contributions. Additionally, donating appreciated securities rather than selling them avoids capital gains taxes, potentially providing tax savings even if you don’t itemize.

Also, since you are donating the asset itself, wash-sale rules do not apply. This allows you to buy back the security at a higher cost basis. This can potentially reduce future tax liability if you decide to sell down the road.

For employees compensated with company stock, donating shares can also help achieve diversification goals and philanthropic impact, while minimizing capital gains tax exposure. Be sure to check if your employer offers donation-matching programs to boost your giving potential.

If you have mutual funds that pay capital gains at the end of the year, consider donating shares before the ex-dividend date. This could lower your taxable distribution. It may help you qualify for an income tax deduction if you itemize. This could potentially reduce your tax liability on those funds.

Consider donating non-publicly traded assets

In addition to cash and stocks, you can also give more complex assets. This includes private company stock, restricted shares, real estate, alternative investments, cryptocurrency, and other valuable property.

These assets have increased in value over time. While donating these illiquid assets can be more complex than cash donations, it can also provide significant advantages. Many of these assets have a low-cost basis. For founders of private businesses, their stock’s cost basis may be nearly zero.

Donating non-publicly traded assets has extra legal and regulatory issues. It’s smart to talk to a tax, legal, or financial advisor before you proceed. Additionally, not all charities have the infrastructure to accept and manage these types of donations.

Donor-advised funds (DAFs) can be a useful option. They can accept and sell these assets easily. DAFs also work closely with donors and their advisors to make the process simpler.

Help Maximize your charitable giving with a donor-advised fund (DAF)

A donor-advised fund (DAF), offered through a public charity, is an efficient way to manage your charitable donations. When you make a permanent contribution to a DAF, you can get an immediate tax deduction. You also have the flexibility to suggest grants to different charities over time. Plus, you can keep all your records in one place.

With a DAF, you can give assets as often as you want. You can also send money to your favorite charities whenever it’s easy for you. Numerous public charities sponsor DAFs.

Once you set up and fund a DAF, you can suggest grants to eligible charities. These are usually IRS-recognized 501(c)(3) public charities, and you can do this whenever you are ready.

DAFs let you make charitable donations in high-income years. This can help reduce taxable income from bonuses, stock options, or portfolio changes. Once donated, assets in a DAF can be invested to grow tax-free, potentially increasing the amount you can give.

DAFs can also play a role in estate planning. You can help many charities with one gift. Just include a bequest in your will to the DAF sponsor. You can also name the sponsor as a beneficiary of a retirement account, life insurance policy, or charitable trust.

Use charitable donations to help offset taxes when rebalancing your portfolio

Regular rebalancing helps keep your investments in line with your goals and risk tolerance. However, selling appreciated assets can lead to significant capital gains taxes.

One strategy to think about is donating some of the securities you would sell. This can help lower your tax impact from rebalancing.

At the same time, you can support causes that are important to you. By combining your charitable goals with your financial planning, you can manage taxes and make a real difference.

Use a "bunching" strategy to help maximize tax benefits

To potentially optimize your tax deductions, consider "bunching" your charitable contributions. This means combining several years of donations into one year. This lets your total itemized deductions go above the standard deduction. As a result, you can claim a tax benefit for your contributions.

Bunching can be very helpful if your usual deductions are just below the standard deduction limit. It is also useful if you have a high-income year or are nearing retirement. This strategy needs you to be flexible and make many years' contributions at once. However, it can help you save on taxes and build a reserve for future charitable giving.

Help offset Roth IRA conversion taxes with charitable donations

Moving assets from a traditional IRA to a Roth IRA can lower future taxes. However, it may have an immediate tax cost.

With traditional IRAs, you can often deduct contributions from your taxes in the year you make them. The money grows tax-deferred, and you pay taxes when you withdraw it. Roth IRAs do not provide a tax deduction for contributions. However, you can make qualified withdrawals without taxes or penalties.

A Roth conversion can be helpful if you expect a higher tax rate later. However, it also comes with important factors to think about, like the tax bill from the conversion.

One way to potentially offset this tax impact is by making a charitable donation. Donating appreciated securities directly to charity can be more tax efficient. This is better than selling assets first and donating the cash after paying taxes. This approach allows you to support the causes you care about while reducing the overall tax cost of the Roth conversion.

Consider a Qualified Charitable Distribution (QCD) from an IRA if you’re over 70½

If you are 70½ years old or older and have an IRA, you can make a Qualified Charitable Distribution (QCD). This is a good way to donate to charity.

A QCD allows you to take money from your IRA without paying taxes. You can donate this money directly to charity. This helps you meet your charitable goals without raising your taxable income. If you’re 73 or older, a QCD can also count toward your required minimum distribution (RMD), allowing up to $100,000 per person in 2023, with the limit increasing to $105,000 in 2024.

QCDs can be especially beneficial if you’re close to your charitable deduction limits or don’t itemize deductions. Because QCDs aren’t reported as income, they don’t affect charitable deduction limits, and you don’t need to itemize to benefit. Typically, itemizers can donate up to 30% of adjusted gross income (AGI) in long-term appreciated assets and up to 60% in cash or property.

If you must take an RMD but don’t need the money, a QCD can help. It can reduce your taxes and support a good cause.

Help maximize your charitable impact with employer giving benefits

Most employees want their personal values to match their workplace culture. Because of this, many employers now provide programs to support charitable giving. These benefits can include donation matching. This is when companies match employee contributions to approved nonprofits.

They may also offer volunteer days. These days let employees spend time on causes they care about.

Be sure to check your employer's offerings to see if they match charitable donations or provide other giving benefits. This can amplify your impact and strengthen your connection to the causes you support.

Bottom Line

Giving strategically allows you to support the causes you care about while making the most of your financial resources. Before you start any giving strategies, talk to a tax, legal, or financial advisor. They can help you get the most tax benefits and make a bigger impact with your donations. By giving to charity wisely, you can help your favorite nonprofits and improve your financial health.

Sources:

https://www.fidelity.com/viewpoints/personal-finance/charitable-tax-strategies

Disclosures:

This article is for informational purposes only and does not constitute financial, tax, or legal advice. Charitable contribution strategies can have significant tax and legal implications, and individual circumstances vary. Before implementing any strategy, consult with a qualified tax advisor, financial planner, or attorney to understand the potential benefits and risks based on your specific situation.

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information

Advisory Services Network, LLC does not provide tax advice.  The tax information contained herein is general and is not exhaustive by nature.  Federal and state laws are complex and constantly changing.  You should always consult your own legal or tax professional for information concerning your individual situation.