I am proud to be part of a community in which tzedaka is a primary value. Our tzedaka goals and the various worthy causes to which we choose to give will vary from home to home. Many of us are conditioned to write out checks or provide credit card information to the various charities that we choose to participate in, but I’d like to shed light on multiple strategies that can help maximize our impact. You should discuss with your accountant or tax advisor which strategy may be most appropriate for you:
Appreciated securities. Appreciated securities, including individual stocks, bonds, mutual funds and ETFs (and even cryptocurrency) are subject to capital gains tax when sold within a taxable account (which typically excludes retirement accounts). Securities that have been held longer than one year are ideal for a charitable donation. The donor may receive an income tax deduction for the fair market value of the security on the date that it is donated and will not recognize the capital gain. In this way, you can deduct the full fair market value of the donated securities and avoid taxes on the appreciation. Consider that had you sold the securities and donated cash instead, you would recognize a gain and be subject to tax. This strategy should be strongly considered by any donor who currently has long-term appreciated securities in a taxable account and itemizes deductions, rather than donating cash.
Donor Advised Funds (DAFs). Donor Advised Funds have increased in popularity over the last several years. A DAF is an account dedicated to charitable giving. The account can be funded with cash, appreciated assets such as securities, or other assets. Donors may recognize a charitable income tax deduction in the year in which the assets are given to the DAF for the market value of the assets transferred. While in the DAF, the assets can be invested in various investment vehicles dependent on the particular DAF being utilized. The key benefit is that those individuals who itemize deductions can receive a full deduction for the value gift in the year that the donation is made but can distribute assets from the DAF to their preferred charitable organizations over several years. The gifts are made to your chosen non-profit organizations directly from the DAF (in most cases funds are sent directly to the organization in just a few computer clicks). This helps simplify charitable giving and record-keeping. The beneficiary of the DAF can either be one or more charities, or successors can be named. I have several clients who make annual donations to their DAF using appreciated securities at the end or beginning of a year, totaling the amount of charity that they plan to give throughout the year, and this practice allows for giving in a well thought out, simple and efficient way. Note that DAFs are not eligible recipients for QCDs, discussed below, as QCDs must go directly to charity.
Corporate match. Many companies generously offer dollar for dollar matches to charities made by their employees. Consult your HR department/benefits guide for further information as restrictions may apply.
“Bundling.” In 2023, the standard deduction for single filers is $13,850 and for married couples filing jointly is $27,700. An additional deduction is available for taxpayers over age 65 or for blind taxpayers. This means that if you do not have itemized deductions above these amounts, you may not receive the full benefit of such deductions. So, for certain taxpayers, charitable gifts below this amount may not result in a deduction, thereby reducing the tax benefit for your gift. Instead, consider “bundling” multiple tax years’ charitable gifts into a single year to obtain a tax benefit. The bundling strategy can be combined with any of the strategies above to take advantage of them for those who might not otherwise itemize deductions. For example: If a Single Taxpayer has $5,000 of non-charitable itemized deductions and typically makes $2,000 of charitable gifts, she will not recognize a tax benefit for her charitable gifts because her $7,000 of total deductions is less than the standard deduction. She could make five years’ worth of charitable gifts in one year which would bring her itemized deductions up to $15,000 in year one, then claim the standard deduction in years two through five. If the $10,000 gift was made to a DAF, she could distribute $2,000 to charity annually, consistent with her current pattern of giving.
Qualified Charitable Distributions (QCDs). If you are age 73 or older, you are required to take Required Minimum Distributions (RMD) from your retirement accounts. One strategy to give to charity is through a QCD. An individual can direct up to $100,000 each year to one or more charities directly from an IRA instead of taking the taxable RMD. This reduces the taxable amount of your RMD. Note that QCDs may only be made from an IRA, not a 401(k) or 403(b). So, if you only have employer plans, have separated from service, and want to use this strategy in 2024, you must take action before the end of 2023 and the funds in the account must be rolled into an IRA in the prior tax year in order to utilize this strategy The benefit is that the amount donated is not treated as income to the donor, and thus avoids tax.
As evident from the many options available, there are ways to give effectively based on individual circumstances. Before writing a check, please consult your tax advisor and financial advisor to determine the best option based on your financial picture.
This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.
Advisory services are provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment adviser.
By Lauren Aliza Ellberger
