Charitable Planning – 4 Tips to Maximize Your Charitable Impact While Minimizing Your Tax Exposure

Trudy Turner, CPA/PFS, CFP®
October 19, 2023

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If your financial goals include making charitable donations to the causes that are important to you, why not take steps to maximize your impact while also minimizing your taxes? The following charitable planning strategies can help you do just that.

#1 – Donate appreciated securities rather than cash.

The most common way to donate to charities is with cash; however, this may not be the most efficient method. If you have appreciated stocks, bonds or mutual funds, you may have an opportunity to increase your donation while also lowering your tax exposure.

Assuming you’ve held the security for at least a year, you can make an in-kind donation of the security to a charity of your choice and claim the security’s fair market value as itemized tax deduction. The benefit of doing so is that the charity can then sell the security without paying taxes on the sale, thanks to the tax-exempt status of qualified charitable organizations.

Because you made a direct donation of the security rather than selling it, you are not subject to capital gains taxes. And, because you donated the security, you are eligible to repurchase the same shares without triggering the wash sale rule. This ability offers you the added benefit of owning the security at a higher cost basis, which can help minimize your future tax liability when you eventually sell the stock.

#2 – Consider a donor-advised fund (DAF).

A DAF is a charitable giving vehicle that allows you to make an irrevocable charitable contribution, receive a tax deduction in the year the contribution is made, then make grants to various charities over time. You can contribute to the DAF as often as you like and allocate donations whenever you wish.

Funding a DAF can be a particularly effective tax planning strategy during years in which your income is higher than normal, because you can make a single large donation of cash, stocks or other assets and take the tax deduction during your high-income year, then donate to charities over several lower-income years. Contributing to a DAF is also an effective strategy to consider as you near retirement, because you can fund it while you are still working then donate to charities throughout your retirement years.

Another benefit of contributing to a DAF is that assets remain tax-exempt as long as they are held within the account. This benefit allows you to establish a charitable giving legacy for your heirs, giving your children and grandchildren a say in how assets are gifted to various charitable causes over time.

#3 – Make qualified charitable distributions (QCDs).

Qualified charitable distributions offer another great opportunity to minimize your tax exposure while giving back to the causes that matter most to you. If you have tax-deferred retirement savings, such as the assets held in a traditional IRA or 401(k), you will need to begin taking required minimum distributions (RMDs) once you reach age 73 (age varies based on the year in which you retire), regardless of whether you need the funds.

When you withdraw funds to meet RMD requirements, the assets are taxed at ordinary income rates, which can lead to a significant tax liability. Instead, you can make a QCD directly to your charitable organization that may satisfy some or all of your RMD annual requirement as well as provide a larger pre-tax donation to your charity. The IRS allows individuals to contribute up to $100,000 per year from a qualified retirement account directly to a charitable organization without paying taxes on the assets.

#4 – Implement a bunching strategy.

“Bunching” refers to the strategy of making a large charitable donation in a single year, then reducing your contributions or not contributing in subsequent years. This strategy is especially effective for those whose deductions consistently fall short of the annual standard deduction limit. For example, if you normally give $5,000 to charity each year and still do not exceed standard deduction limits, calculate if giving two or three years’ worth of charitable gifts will allow you to itemize in the current tax year. In the following years, you are still eligible to take the standard deduction even without making your typical $5,000 charitable donation. And if you pair the bunching strategy with a DAF, if desired you can still send the same amount of monies to your charities annually through the DAF although you have already taken the tax deduction in a previous year.

Could you use some help implementing a tax-efficient charitable giving strategy? We would love to have a conversation. To learn more about how United Capital Financial Advisors can help you plan for the future, please contact us.

Trudy Turner,CPA/PFS, CFP® is a Wealth Advisor at United Capital Financial Advisors

This commentary contained herein is intended for informational purposes only and should not be construed as tax, legal or investment advice. Past performance is not indicative of future results. Clients should obtain their own tax, legal or investment advice based on their circumstances. The material is based on sources deemed reliable but is not guaranteed.

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