Tax and finance experts list ways to give to charities and cut your tax bills at the same time, ahead of Giving Tuesday November 28.
Americans gave nearly $500 billion in 2022, most of it ($319 billion) from individuals. That’s a slight decline from the previous year, but still a hefty chunk of money!
So, as we approach the end of another year, it’s a good time to think about taxes, and how to pay less.
Charitable giving is one way. Tax advisors and financial advisors say there are several options to give to your favorite charities and cut your tax bills at the same time.
Qualified Charitable Distribution
Qualified Charitable Distribution: People turning 72 this year and 73 next year have to start taking money out of their retirement accounts, or RMD. The withdrawals count as ordinary income and can boost your taxes or even push you into a higher tax bracket.
People who don’t need the money can have that RMD donated directly to the charity of their choice. “People who are over 70 ½ could do $100,000 each, so married couple could donate $200,000 from their IRAs directly to a 501 C charity, and they don’t pay income taxes on that distribution,” says Mitchell Katz, co-founder and partner at Capital Associates in Bethesda, Maryland.
“For someone that is charitably inclined, and they have retirement accounts, this is literally eating your cake and having it too,” says Nicholas Yeomans, president of Yeomans Consulting Group in Marietta, Georgia. “This is one of the absolute best charitable giving tax strategies that somebody could use today.”
In addition, courtesy of The Secure Act 2.0, people over 70½ can made a one-time $50,000 donation to a charitable remainder trust or charitable annuity without being taxed on the distribution. It will count as a RMD of the IRA owner is 73 or older.
Donor Advised Fund
Donor Advised Fund: You can donate into a Donor Advised Fund, take the deduction and use that fund to make charitable donations over multiple years. For example, you can put $50,000 into a fund, you can dole out $10,000 donations for five years. The catch: “You will get your donation in the year that you put the money into the donor advised fund,” says Katz. So, if I put $25,000 into a donor advised fund or $50,000 into a donor advised fund this calendar year, that’s where I get the deduction. When I distribute the money in future years, I don’t get to take that deduction again.”
“If you don’t know the future of your giving, you just want to set up a situation where we want to be philanthropic and you want to manage your giving over time, a donor advised fund is a good way to do that,” says Billy Voyles, president of Fundamental Wealth Designs in Stillwater, Minnesota. “Because it allows you more control over when to give. Any growth after you donate in the donor advised fund is tax free to that charity as well.
“Many of these people that choose to do this are going to be able to get better than the standard deduction,” says Yeomans. “And now their donor advised fund for the next six years will make their gifts to their church, their charity, their nonprofit of choice on their behalf. This is a really simple, inexpensive and easy way to bring someone’s tax burden down and also bless the organizations that you care about.”
Charitable Remainder Trust
Charitable Remainder Trust: Voyles says another option is to use highly appreciated property, such as a second home in the mountains or in Florida, for example. “Obviously over the last few years, they’ve seen significant appreciation. You can place the property into the charitable remainder trust. You can continue to use it and receive benefits, for example if you’re renting it out, while you’re still living. But once you pass away, the remainder of that is then given to the charity.
“As long as they live and if they generate income from it, it would be taxable income while living,” Voyles says. “But then the remainder of it is passed to the trust at death, and they get a big tax deduction for putting it in there to begin with.”
Highly Appreciated Stocks
Highly appreciated stocks: You have a stock in your portfolio that has appreciated over the years. That means paying capital gains taxes. Instead, you can donate that appreciated stock to a charity and you avoid paying the capital gains, but so does the charity that you donate to.
“So, if you have a stock that was granted at $50 a share, X years ago, and now that thing’s $150 a share, you would owe the capital gains on that 100 bucks.
“You can take those highly appreciated shares, and actually donate the shares directly to the charity and then the charity is not taxed on that. It’s a really neat way to get highly appreciated assets out of your portfolio to the to the charity, and you’re not paying tax on it, and neither are they,” he says.
Rodney A. Brooks is the former deputy managing editor/Money at USA TODAY. His retirement columns appear in U.S. News & World Report and Senior Planet.com. He has written for National Geographic, The Washington Post and USA TODAY. The author of “Fixing the Racial Wealth Gap,” Brooks has testified before the U.S. Senate Special Committee on Aging. His website is www.rodneyabrooks.com.
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