Nonprofits play a vital role in addressing global challenges, from disaster relief to economic recovery. Supporting these causes can be as rewarding for your finances as it is impactful for the communities served. By employing tax-smart strategies, you can amplify your charitable giving while also benefiting your bottom line.
Let’s explore eight strategies that can help you make the most of your generosity.
1. Donate Long-Term Appreciated Securities Instead of Cash
While cash donations are the most common way to give, donating appreciated securities like stocks, bonds, or mutual funds can provide substantial tax benefits.
- Key Benefits:
- Claim the fair market value of the securities as a deduction if held for over a year.
- Avoid capital gains taxes you’d owe if you sold the securities.
- Deduct up to 30% of your adjusted gross income (AGI) in one year.
This strategy is particularly beneficial for individuals holding large positions in employer stock or mutual funds with year-end distributions. It not only supports diversification but also reduces potential capital gains tax liabilities.
Pro Tip: Check if your employer offers matching donations to maximize the impact.
2. Leverage Non-Publicly Traded Assets
Complex assets such as private company stock, real estate, cryptocurrency, or alternative investments can be donated for a significant tax advantage.
- Why It’s Valuable:
- These assets often have low cost bases, meaning donating them avoids significant capital gains taxes.
- Entrepreneurs can donate private company stock, potentially reducing estate taxes.
However, these donations require expertise and coordination. Partnering with a donor-advised fund (DAF) or consulting professionals can simplify the process.
3. Streamline Giving Through a Donor-Advised Fund (DAF)
A DAF is a flexible charitable giving account sponsored by a public charity, allowing you to contribute assets, receive immediate tax benefits, and distribute grants over time.
- Key Advantages:
- Immediate tax deduction upon contribution.
- Assets in the DAF can be invested and grow tax-free, enabling larger future grants.
- Simplified tax recordkeeping and the ability to support multiple charities from one account.
Incorporating a DAF into your estate plan ensures long-term support for your favorite causes.
4. Offset Taxes Through Portfolio Rebalancing
Regular portfolio rebalancing may trigger capital gains taxes. Donating a portion of appreciated securities instead of selling them can help reduce these taxes while meeting philanthropic goals.
- Example:
If a rebalance would result in $50,000 in capital gains, donating those securities could provide a tax deduction and eliminate the need to pay capital gains taxes.
Aligning rebalancing with charitable giving ensures your financial plan and philanthropic goals work hand in hand.
5. Use a Bunching Strategy
For taxpayers whose itemized deductions fall below the standard deduction, a bunching strategy can maximize tax benefits by concentrating charitable contributions in a single year.
- How It Works:
- Combine several years’ worth of donations into one tax year.
- Itemize deductions that year to exceed the standard deduction.
This approach is especially useful during high-income years or when preparing for retirement. After making the lump-sum donation, you can continue supporting charities over time, especially if you use a DAF.
6. Offset Roth IRA Conversion Taxes
Converting a traditional IRA to a Roth IRA can result in significant taxable income. Pairing this strategy with a charitable donation can help offset the tax costs.
- Why It Works:
- Donations of long-term appreciated securities can provide a deduction to offset taxable income from the conversion.
This approach not only reduces taxes now but positions you for tax-free withdrawals in retirement.
7. Make Qualified Charitable Distributions (QCDs) from Your IRA
Individuals aged 70½ or older can make tax-free distributions of up to $100,000 annually ($105,000 in 2024) directly to charity from their IRA.
- Key Benefits:
- Satisfy required minimum distributions (RMDs) without increasing taxable income.
- Avoid itemization requirements, making this ideal for taxpayers who take the standard deduction.
Note: QCDs cannot be directed to a DAF but are a straightforward way to support qualified charities.
8. Maximize Employer-Sponsored Giving Benefits
Many companies offer workplace giving programs, including:
- Matching Contributions: Employers may match your charitable donations dollar for dollar, doubling your impact.
- Volunteer Grants: Some companies donate based on employee volunteer hours.
Check with your HR department to understand and leverage these benefits.
Final Thoughts
Charitable giving is a deeply personal decision that reflects your values and priorities. By using these tax-smart strategies, you can enhance your impact while optimizing your financial outcomes.
Before implementing any of these approaches, consult with legal, tax, or financial professionals to tailor strategies to your unique situation. With proper planning, you can make the most of your generosity—both for the causes you care about and for your financial health.
Which of these strategies do you find most appealing? Share your thoughts or consult a financial advisor to explore how these tips can fit into your giving plan.
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