December 4, 2023

Tax-efficient giving comes with specific guidelines

With the holidays and end-of-year deadlines, charitable giving is top of mind for many people. Cash is generally the least tax-efficient method of making charitable donations—and while there are much more efficient options available, it’s important to understand the rules around these gifts.


Appreciated Assets
Gifting stock that has significantly appreciated allows you to avoid the capital gains tax any sale would incur and receive a tax deduction for the full fair market value of the security. Many charities have brokerage accounts and can receive such gifts directly, or you can make these gifts through a donor advised fund. For this type of gift, you may be able to deduct up to 30% of your adjusted gross income. If you gift more than you can deduct, the deduction can be carried forward for up to five years. These transfers can take a while, so if you want to make it in the current tax year, it’s best to initiate the process by mid-November. (If your charity happens to have an account at the same brokerage, the timeline may be several weeks shorter.)
It is also possible to give business interests and real estate that have appreciated, though these gifts take significantly more lead time and have very specific rules that need to be followed in order for the gifts to be deductible. For example, you can’t have a pre-arranged sale of the asset established. You’ll want to work with qualified professionals and start well before year-end.


Retirement Account Assets
If you are over 70 1/2, a qualified charitable distribution (QCD) from your IRA to charity won’t be recognized as income. The current limit is $100,000, but under SECURE 2.0, that will be indexed for inflation after 2023. The receiving charity must be a qualified 501(c)(3). Donor advised funds, private foundations, and supporting organizations do not qualify – although you can name a donor advised fund as the beneficiary of an IRA. You can’t take the distribution yourself and then turn around and give the cash to the charitable organization and have it count as a QCD; that would be a taxable distribution with an offsetting deduction for the gift to charity. Generally, you’ll want your IRA custodian to send a check directly from your IRA account to the charity.
Both IRAs and employer-sponsored plans can name charitable organizations as beneficiaries, but qualified charitable distributions are limited to IRAs. You should discuss with your advisor and accountant whether rolling your employer-sponsored plan to an IRA so that you can make QCDs makes sense for you.
It is also possible to make a one-time gift from your IRA to fund a charitable gift annuity (CGA), charitable remainder annuity trust (CRAT), or charitable remainder unitrust (CRUT). The money is invested and you receive income during your lifetime in the case of the annuity, or during the term of the trust. However, the amount is limited to $50,000 per individual, which is a bit low to justify a trust’s legal and administrative costs. However, a CGA could be a very attractive option, particularly given the current interest rate environment.


Donor Advised Funds
A donor advised fund (DAF) can be a great way to consolidate your giving and make tax reporting easy. You can donate a variety of assets to the fund in years when your income is high and use the charitable deduction, and then gift from the fund in later years when your income is lower and you may not have the funds to do the giving you’d like to do from your regular cash flow.


Your Fulcrum advisor is here to help you understand how much you can afford to gift to your favorite charitable organization(s) without putting your long-term financial security at risk. We can also work with your accountant to help determine the ideal amount to gift in a given year from a tax perspective. If you still need to discuss your charitable goals with your advisor, reach out and let us know what you’d like to do. We’ll help you make it happen.

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