Stewardship

How you can defer or reduce taxes through charitable giving?

1. Income tax strategies—Donations to 501(c)(3) public charities qualify for an itemized deduction from income. Because the tax rate is then applied to a reduced income, this can minimize your overall tax liability. Many donors don’t realize that there are many ways to maximize this seemingly straightforward deduction. For instance, you can “bunch” your charitable contributions in a single tax year, using a donor advised fund, to increase the amount you donate in a high income year, and then the funds can be used to support charities over time. Or you can make a combined gift of appreciated assets and cash to maximize your benefits.

2. Capital gains tax strategies—You can use charitable contributions to reduce your capital gains tax liability by donating long term appreciated assets. Not only can you deduct the fair market value of what you give from your income taxes, you can also minimize capital gains tax of up to 20 percent. Assets subject to capital gains taxes can include investments like stocks or mutual funds, or hard assets like real estate. They can include assets that are both publicly traded or non-publicly traded. For example, some givers donate shares of a private business before it is sold to dramatically increase their charitable impact.

3. Estate tax strategies—The federal estate tax is a tax on the transfer of your property at your death. In 2022 the estate and gift tax exemption is $12.06M per individual, so fewer estates will be subject to this tax. By making properly structured gifts and donations, you can remove assets from your estate before the total is tallied and taxed. In fact, you have an unlimited charitable deduction if your estate plan makes gifts to charities.

What tax strategies can be used for charitable contributions?

1. Long-term appreciated assets—If you donate long-term appreciated assets like bonds, stocks or real estate to charity, you generally don’t have to pay capital gains, and you can take an income tax deduction for the full fair-market value. It can be up to 30 percent of your adjusted gross income.

2. Donor-advised fund - A donor-advised fund is a dedicated account for charitable giving. When you contribute to a charity that sponsors a donor-advised fund program, such as Fidelity Charitable, you are eligible for an immediate tax deduction. You can then recommend grants over time to any IRS-qualified public charity and invest the funds for tax-free growth. Donor-advised funds provide many benefits for organizing and planning giving, but they also offer advantages in terms of income, capital gains and estate taxes. In some cases, these benefits are more advantageous than those from contributing to a private foundation.

3. Charitable Remainder Trust (CRT) –  A charitable remainder trust is a “split-interest” giving vehicle that enables people to pursue philanthropic goals while still generating income. Tax exempt and irrevocable, they are designed to reduce the taxable income of individuals. A charitable remainder trust dispenses income to one or more non-charitable beneficiaries for a specified period and then donates the remainder to one or more charitable beneficiaries.

4. Qualified Charitable Distributions (QCDs) - A qualified charitable distribution (QCD) allows individuals who are 70½ years old or older to donate up to $100,000 total to one or more charities directly from a taxable IRA instead of taking their required minimum distributions. As a result, donors may avoid being pushed into higher income tax brackets and prevent phaseouts of other tax deductions, though there are some other limitations.