The season of giving is upon us, but that idea goes well beyond the exchanging of gifts. The final months of the year are also an ideal time to wrap up your charitable donations. Did you know that some ways of giving are more effective than others?
By understanding how to maximize the benefit of your charitable donations, you’ll be able to increase the impact of your gifts. There are a couple of things to consider for maximizing your charitable donations.
It’s More Than a Tax Deduction
Tax-deductible giving is often great for your bottom line, but it doesn't make sense to only give to an organization because it will get you a tax write-off. Find a charity that means something to you. Giving is one way you can have an impact on your community or even the world. Make your donations count!
Take Advantage of Tax Benefits
By structuring your donations properly, you can save more on your tax bill which gives you the option of giving even more to charity. You can also make your donations more impactful by making them from the right place.
For example, at Asset Preservation Wealth & Tax, we regularly set up charitable contributions for our clients that take advantage of tax savings by making donations directly out of their IRAs. If you have reached the point where you must take required minimum distributions (RMDs) from your IRA and you want to give to a charitable organization, it may be better to donate directly from your IRA than it would be to write a check! By simply sending them money, you still must take and pay ordinary income and capital gains taxes on those minimum distributions.
However, by donating directly from your IRA, you can count that donation toward your minimum distribution. This gives you two main benefits. First, charities don’t pay income tax, so 100% of your total outlay goes to the charity rather than having to send some of it to the government. Second, by donating appreciated assets in your IRA directly instead of selling them and then using the money to make your donation, you can avoid paying capital gains taxes. This tip counts for inherited IRAs as well!
The IRS has recently changed its ruling on required minimum distributions from IRAs you inherit. Previously, inherited IRAs had to be completely dissolved within 10 years, but you could choose when and how to draw the accounts down. Now, the IRS has clarified to say RMDs must be taken from inherited IRAs just as with your own IRA.
If you want to give $10,000 to a charity and you withdraw money from your IRA to do so, you may not get a tax deduction unless you itemize your donations. After paying taxes, it could cost you $13,000 to give that $10,000 to that charity! By donating directly from your IRA, you avoid that tax having to be paid, which means your donation can have as much as 30% or more value. That lets you more directly impact your charity of choice.
Use Qualified Charitable Distributions toAvoid RMD Stacks
You don’t want to let RMDs stack up. If you turn 72 this year, you have until next April to start taking RMDs. But if you wait until then, you’ll have to take two RMDs next year. That can cause your income to be high enough to move you into a higher tax bracket. To avoid that, you can instead donate IRA assets to a qualified charity.
By structuring charitable giving properly, you not only help yourself, but the recipients of your donations as well. You benefit by not having to pay unnecessary taxes, and the charity also benefits by getting more value from your donation than might otherwise be possible.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
