While some Social Security strategies have been discontinued, there are still a few under-utilized strategies…
There are many cool ways to get the greatest bang for your charitable giving buck, and this article will explore two techniques that are simple, relatively new, and effective.
First is the Qualified Charitable Distribution (QCD) from an IRA. Unfortunately, this technique is only allowed if you are at least 70.5 years of age. Yes, that is 70.5 or older, and not a day before. The QCD allows you to give money directly from your pre-tax IRA to charity without reporting the taxable income distribution. You cannot use a charitable deduction for this distribution, but the fact that the income is tax-free is more than enough. The distribution also counts toward your required minimum distribution.
Now, you may not immediately find this fascinating or very beneficial, but as a tax accountant, the QCD is something to get excited about. First, the new tax law with a higher standard deduction is causing many charitable donations to lose some or all of their deductibility as an itemized deduction. The QCD assures every dollar (up to a max of $100,000/year) given to charity from a pre-tax IRA is completely tax-free. In addition, the distribution from the IRA is not part of your taxable income and therefore reduces your Adjusted Gross Income (AGI). Many components of the tax return, and your yearly Medicare premiums, are impacted by your AGI. If you are over 70.5 and taking Required Minimum Distributions plus giving to charity, then do yourself a favor and give only through the Qualified Charitable Distribution from an IRA. The QCD should inspire you to celebrate your 70 1/2th birthday instead of your 70th birthday. (One word of warning: when doing a QCD, you will not receive anything from the IRA custodian telling the tax preparer or TurboTax™ that funds from the IRA went to charity. The IRA custodian will merely say how much taxable income came from the IRA in total, including what went to charity. It is up to you to remember to get the reduction for the QCD when your taxes are prepared. Let me emphasize this point: it is up to you to make sure gifts from the IRA to charity are reduced on the tax return, as you will get no notices saying how much went to charity from the IRA.)
Next is the Donor Advised Fund (DAF), which most major brokerage firms offer, including Schwab, Fidelity, and Vanguard. Any contributions you put into the DAF are tax-deductible in the year of the gift, but the money can then be gifted to charity from the DAF anytime in the future, whether one month later or 20 years later. As the money sits in the DAF, it can be invested as conservatively or aggressively as you desire. The investment return can then increase the tax-free gifts you can make to charity.
If that is not cool enough, then consider the other major benefits. For one, the DAF only requires one donation receipt for a charitable gift in the year of the gift. This is critical, because the IRS has been on a rampage of denying deductions for valid charitable gifts because the taxpayer did not have a proper receipt in hand when the tax return was filed. You read that correct: the IRS can and will deny a deduction for valid gifts to charity for failure to have the receipt in hand when the tax return is filed. The DAF eliminates hunting down charitable receipts for each gift. When you direct money from the DAF to charities month-to-month or year-to-year, there is no further requirement to get a receipt.
In addition, you can give appreciated long-term stock to a DAF and get a full tax deduction for the fair market value of the stock. For example, if I buy a 100 shares of stock at $10 that appreciates to $100 and then give all 100 shares to charity three years later, I receive a $100,000 tax deduction for an asset that I only paid $10,000 for and never pay tax on the $90,000 gain. Now that gives us CPAs goosebumps. Wait – it gets better! Since it is difficult for your charitable deductions to be eligible for itemization in the new tax law, we use the DAF to batch many years of charitable giving into one. If you typically give $20,000 per year, and you want to batch the next five years into one, then you would give $100,000 of stock in this year and move the money to charity over the next five years. All the while, your DAF funds are invested, and each year I can re-accumulate the funds I would have given charity from income back into investments. With this strategy, you receive the full deduction for appreciated stock, fit almost all of your itemized charitable deductions for five years in one year, and use the funds for any charitable pursuit you desire without concern of receipt-gathering. Note that this strategy is as worth doing with a cash donation as it is with appreciated stock. If you are ready to implement the DAF strategy, then get ready – the best part is coming up next: if you make a big DAF contribution and know you are going to get a large one-year tax deduction, convert monies from a pre-tax IRA to a Roth IRA to turbo-charge your overall tax plan. Wow – now that is over the top!
If you are charitable-minded and this seems intriguing, but you need help with implementation, then please get in contact with a Financial Consulate Financial Advisor to begin your path to maximized charitable donations.