For many of us, the holiday giving season includes more than simply exchanging gifts with loved ones. Philanthropic giving can have a meaningful impact on organizations and causes close to our hearts – with significant financial and tax incentives for us as donors. Here are a few considerations to keep in mind when planning your year-end philanthropy.
Determine Your Giving Strategy
Once you've chosen a nonprofit, it's crucial to determine your giving strategy. Will you make a one-time donation, set up a recurring gift, or explore alternative methods such as donor-advised funds or a private foundation? Each approach has its advantages, depending on your financial situation and goals. And while some of these giving vehicles can be set up quickly, others may require more time and resources to get off the ground. Read more about how to select the giving vehicle that’s right for you.
Understand Tax Benefits
One incentive for year-end charitable giving is the potential for tax benefits. Here are a few tax considerations to be aware of:
- Not ready to designate your gift yet? Contributions to donor-advised funds (DAFs) are tax-deductible in the year they are made, even if the funds are distributed to charities in later years.
- Not all gifts are created equal. Gifting appreciated stock rather than cash may offer more advantageous tax implications, such as allowing you to avoid paying capital gains taxes. Similarly, donating the cash from the sale of depreciated securities can act as a tax-loss harvesting strategy. Make sure you’re giving in the way that works best for you.
- If you still need to take a required minimum distribution (RMD) from your IRA this year, making a qualified charitable distribution (QCD) from an IRA directly to a charity can satisfy this requirement. Up to $100,000 can be gifted from an IRA tax-free.
- Is this a high-income year, or are you preparing for retirement? "Bunching" your deductions by making several years’ worth of charitable gifts can help maximize your tax benefit if your total itemized deductions exceed the standard deduction.
To maximize the impact of your year-end charitable gift, it's essential to be aware of donation deadlines. Many nonprofits have cutoff dates for wire transfers and other gift types before December 31 to ensure donations are received for the current tax year. Additionally, financial institutions may have their own deadlines for transferring funds to DAFs or other charitable accounts.
Additionally, if you’re establishing a new giving vehicle to support your philanthropic plans, you’ll need to ensure that you leave adequate time for administrative setup. A donor-advised fund can typically be set up in a matter of days. A personal foundation or trust can take weeks or longer. The creation of these giving vehicles is typically best done as part of your larger philanthropic and financial strategy developed in consultation with your trusted advisors.
Document Your Donation
To claim charitable deductions on your tax return, it's crucial to keep detailed records of your donations. This includes written acknowledgment from the nonprofit of your giving (or total cumulative giving, if you’ve made repeat gifts throughout the year), receipts for cash donations, and records of non-cash or in-kind contributions. Accurate documentation is vital to substantiate your deductions and comply with IRS regulations.
It’s never too early to start thinking about year-end giving. Your RMB advisor is here to help you think through how to achieve your intended impact in ways that make financial sense for you. Contact our team today to learn more.
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