Finding ways to optimize your financial health while also making a positive impact on the world can be a challenging endeavor. One powerful avenue that intersects both goals is charitable giving. Not only does charitable giving allow you to support causes you care about, but it can also offer substantial tax benefits when combined with the right strategies. Effective tax strategies for charitable giving include distributions from an IRA, charitable remainder trust (CRT), donor-advised funds (DAFs), and private foundations.
Distributions from an IRA: A Tax-Efficient Giving Strategy
Individual Retirement Accounts (IRAs) are popular vehicles for retirement savings, but they can also play a significant role in your charitable giving strategy. For those aged 70½ or older, a qualified charitable distribution (QCD) allows you to directly transfer up to $100,000 annually from your IRA to a qualified charity. This distribution is not included in your taxable income, which can provide a double benefit: reducing your taxable income and supporting a cause you care about.
Charitable Remainder Trust: Balancing Income and Giving
A Charitable Remainder Trust (CRT) is a versatile tool that enables you to support a charitable cause while generating income for yourself or your beneficiaries. Here’s how it works: you establish a trust and contribute assets. The trust then makes regular payments to you or your beneficiaries for a period or lifetime. The CRT can sell appreciated assets tax-free, enhancing the donor’s income stream. Once the trust term concludes, the remaining assets are distributed to the designated charity. This strategy allows you to contribute to a cause close to your heart and offers potential income and estate tax deductions.
Donor-Advised Fund
Donor-advised funds (DAFs) offer a practical and flexible means to contribute to causes you deeply care about. When you irrevocably contribute to a DAF, you can take an immediate tax deduction, even if you decide on the beneficiaries later. This feature allows you to proactively manage your tax burden while maximizing your charitable giving in high-income years, such as a company sale, real estate transaction, or significant gain from the sale of stock shares.
Donations can be made in cash, stocks, or non-publicly traded assets, including private company shares, real estate, and business interests. After the donation is in the DAF account, donors can gradually donate to eligible charities while they invest and grow their assets, increasing the amount available for charitable giving. The organization where the account is held (i.e., Charles Schwab) will review the grant recommendations for compliance with tax regulations. Once approved, they distribute the grants to the organization.
DAFs offer a convenient, streamlined approach to giving. Donors can choose to remain anonymous if preferred. DAFs can be established as family accounts, allowing generations to participate in charitable giving and pass down philanthropic values. DAFs are a tool that can turn individual generosity into lasting change.
Private Foundation
Creating a private foundation provides a structured and personalized approach to charitable giving, allowing individuals or families to have a direct and hands-on role in shaping their philanthropic endeavors. Private foundations enable donors to maintain a lasting legacy by supporting causes aligned with their values, while also offering potential tax benefits. However, it’s important to recognize that running a private foundation involves administrative responsibilities, compliance with regulations, and careful management of funds to ensure they are effectively channeled toward creating the intended positive impact. Also be aware, there are lower donor income tax deduction limits (30% adjusted gross income (AGI) and annual charitable distributions are required.
Making Your Strategy Work for You
Crafting an effective tax strategy involving charitable giving requires careful consideration of your financial goals, tax situation, and philanthropic values. As you explore the various avenues mentioned here, keep these key points in mind:
- Alignment of Values: Choose causes that resonate with your values and beliefs. When your giving is meaningful to you, the impact is more profound.
- Timing: Understand how your tax situation fluctuates over time. Consider giving in high-income years to optimize your deductions and minimize tax liability.
- Legacy Planning: Think about the long-term impact you want to leave. Charitable giving can create a legacy that reflects your values.
- Professional Guidance: Consult with an advisor at Janiczek Wealth Management. We specialize in financial, tax, and estate planning. Our expertise can help you navigate the complexities and make informed decisions.
Conclusion
The world of tax strategies and charitable giving offers many opportunities for those seeking to make a positive impact while optimizing their financial situation. Whether you are considering IRA distributions, charitable trusts, or donor-advised funds, tailoring your strategy to your unique circumstances is critical. By doing so, you can achieve your financial goals, support causes you’re passionate about, and leave a legacy that reflects the values that matter most to you.
At Janiczek we recognize that philanthropy as a profoundly personal journey. By understanding your financial situation, aspirations, and preferred causes, we partner with you in creating a comprehensive plan that maximizes your charitable impact while optimizing your tax benefits. To learn more about Janiczek Wealth Management and our holistic approach to wealth management contact Cathy Wegner, Director of New Client Engagements, at 303-339-4480 or cwegner@janiczek.com.
