Imagine all the people
Sharing all the world
You may say I’m a dreamer
But I’m not the only one
I hope someday you’ll join us
And the world will live as one
John Lennon – Imagine
On this GivingTuesday, many people can use help this year given the geopolitical events around the world and here in the U.S. as people are still trying to deal with the impact of inflation. Reimagine a world built upon shared humanity and radical generosity. Let’s take a look at the ways to maximize the impact of your gift to help others as well as how to help yourself with taxes.
The Joy of Giving
We are all aware of the benefits others receive from our giving and how it can provide money, food, and healthcare that they could not have gotten otherwise, but are you aware of the benefits to the person making the charitable gifts?
- One study has shown that giving can increase your happiness (as much as someone who doubles their income!)
- Another study has shown that charitable giving can reduce stress and blood pressure
- This is one of the fastest ways to make it onto Santa’s Nice List!
Several strategies can be used to help lower your tax burden for doing something nice:
1. Lower your overall tax burden
If you itemize, you can get a tax deduction for the money or assets that are donated. The IRS will allow you to get a deduction of up to 30% of your Adjusted Gross Income (AGI) for assets and 60% of your AGI for cash donations. Let’s say your AGI is $100,000, you can then deduct up to $30,000 for stock you donate and up to $60,000 of the donation if you give cash. With proper planning, you can take advantage of both of these numbers. Let’s say you want to give $40,000. In this example, you can give $30,000 in stock to get up to the 30% limit and then donate $10,000 in cash to get up to the $40,000 gift, while still getting the full deduction for the $40,000 donation.
2. Donate appreciated assets
Giving stock that has appreciated is a great way to reduce taxes. Let’s say you bought ABC company stock for $20, and it is now worth $100. If you donate the stock, you can avoid paying taxes on the $80 in capital gains. This allows you to avoid taxes altogether (and you will get a tax deduction if you itemize). Aside from stocks, other assets like ETFs, mutual funds, cryptocurrencies, and other assets work as well.
3. Avoid unnecessary taxes with a Qualified Charitable Distribution (QCD)
If you are 70.5 years or older, you can take money out of an IRA tax-free and give this to charity and they do not have to pay taxes on the money either. This is even more advantageous if you are subject to Required Minimum Distributions (RMDs). Let’s say the IRS requires you to take $30,000 out of your IRA but you do not need the money. You can elect to use a QCD and give any portion of that $30,000 to charity and this will satisfy your RMD requirement for the year and neither you nor the charity will pay taxes on the QCD as well! The IRS allows you to gift up to $100,000 per year using a QCD. Beginning 2024, the QCD limit ($100,000) will change as it will be linked to inflation.
4. Get the tax deduction now and gift the money later
If your income is higher than normal this year due to a one-time event like selling a home or business, then using a Donor Advised Fund (DAF) is a great tool to control taxes. A DAF allows you to put money into the account and get the tax deduction now and you choose when and how the money goes to charities. For example, a recent client makes $200,000 per year but sold a small business for $1 million. The sale of the business can create a large tax burden, so using the DAF allows our client to get the deduction for a large gift now (in the year they need it most) and will grant that money to 501(c)(3) charities from the DAF over the next several years.
Strategic Gifting for Maximum Impact
It is important to try and make sure the gift you are making will be handled responsibly and used as you would hope. Here are some things you can do to maximize the impact of your gift:
1. Not all charities are created equal
One of the most important things to look at is how much of your money is being used for the benefit of others. Some charities operate more like a corporation and a larger portion of the donation lines the pockets of those operating the charity and less goes to those that need it most. Simply put, for every dollar you give it is ideal for 75 cents or more to go to those in need with the charity retaining 25 cents. CharityWatch.Org is a great website to look into this.
2. Pursue charities you are passionate about
It is ideal to find a charity that is involved in something you are passionate about. Maybe it is feeding the homeless, supporting refugees, or stopping cancer. There are many wonderful charities out there that work tirelessly and do not get the credit they deserve. Use a website like CharityNavigator.Org to find charities that need your help.
3. Donate more than just your money
Charities often can use volunteers or your talents as well. For example, I had a client retire that was in finance his entire career. He decided to leverage his talents in retirement to volunteer for several charities to be their CFO and help them better manage their finances. This allowed those charities to have a greater impact and attract more donors.
You may say I ‘am a dreamer, but we all should be thinking about giving more this year. I hope someday you’ll join me and use the resources provided here to help you maximize your gifting. If you would like to explore any of these items in greater detail do not hesitate to reach out to us at FinancialPlanning@BFSG.com.
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