November 2022: Charitable Giving

The holiday season is upon us! This brings colder weather, family gatherings, and an increase of baked goods in our diets. The holidays also bring something other than a perfectly cooked turkey to the table. The greater feeling of generosity. This can come in many forms: You may volunteer at your church, you might help your neighbor shovel the driveway, or you’re inclined to gift money to your favorite charitable organization. I won’t tell you where to gift your money, but RMB can help you gift in the most tax advantageous way.

First, let’s understand the tax benefit when gifting to charities. If one gifts cash or an asset, the gifted amount can reduce the doner’s taxable income. Changes in the tax code in 2018 raised the standard deduction to a higher threshold and therefore most Americans do not get to deduct their charitable gifts. So, how is RMB helping our clients meet their charitable goals and receive a tax benefit under these circumstances? Let’s review some common strategies.

Gift Bunching/Donor Advised Fund (DAF):

Gift bunching is taking multiple years of gifts and grouping them into one single year. Gifting a larger amount pushes you into itemizing your deductions (instead of taking the standard deduction), therefore receiving the charitable tax deduction. Gift bunching can be executed in 2 ways; gifting the larger amount directly to the charity or establishing a Donor Advised Fund. 

A donor advised fund (“DAF”) is an investment account designated for charitable usage.  When using a DAF, you receive the immediate tax benefit but can send the funds out to non-profits at your discretion. The funds are invested in the DAF allowing for the account to grow over time. 

Gifting Appreciated Assets:

Since non-profit’s don’t pay taxes the best gift to them are assets with a lot of embedded long-term gains. You avoid the tax, and the charity still gets the full value of the gift!  RMB’s extensive usage of separately managed accounts makes this a great option for many of our clients.  

Qualified Charitable Distributions:

The qualified charitable distribution (“QCD”) can be used by those over the age 70.5. In this strategy you can take money from a tax deferred account, for example: an IRA, and gift it to a charity of your liking. In a normal distribution from a tax deferred account the account owner would pay income tax on the distribution, but with a QCD, you do not pay a single penny.  This becomes particularly attractive once you are over 72 and the government forces you to take Require Minimum Distributions from your IRA accounts.  You can fulfill some or all of your obligation by gifting to charity from your IRA and avoid ordinary income taxes on those distributions.   

Combining Strategies:

We use some or all these strategies with clients to enhance the tax advantaged status of their gifting.  You can bunch gift appreciated stock to the DAF and use a QCD to a specific charity. Combining techniques avoids capital gains, achieves a tax deduction, reduces ordinary income, and fulfills gifting goals for years to come. A Holiday Miracle! 

Whether you are gifting your time or money, I encourage you to find a cause near and dear to you. For me that is the Kinship Community Food Center in Milwaukee. Although the food, toiletries and time I donate does not call for complex planning, don’t let this example deter you from talking about your charitable goals with your advisor. For those that are charitably inclined this holiday season, let’s have a conversation to achieve your gifting goals tax efficiently.