In our country today, there are more opportunities than ever to give back to causes that are close to our hearts. In fact, in the U.S. alone, there are over 1.5 million non-profit organizations and even more internationally, making it easy to contribute to an organization you care about.
The way in which you donate your wealth to these charities is an important piece of your financial plan. There are several strategies you can apply to your yearly giving plan to help ensure you maximize your tax and income benefits.
Establish a Donor Advised Fund
One vehicle for donating that continues to grow in popularity is a Donor Advised Fund (DAF). DAFs are essentially accounts that allow you to sponsor a specific charity over a given period of time, and are operated by a third-party provider. Once a contribution is made on your behalf by the DAF, the chosen charity has control over the assets in the account and can disperse the donation as they see fit. DAFs are often chosen because they are a convenient and organized way to give, and when you donate to a DAF, you immediately receive a tax deduction prior to naming the accounts’ beneficiaries. It is important to note that gifts to DAFs are limited to 30% of your adjusted gross income.
Bunch Your Charitable Donations
One strategy that can reduce your tax liabilities is bunching your charitable donations. For example, you can donate the amount of money you would give over two years in one year instead. The strategy here is that the more you give in that specific year, the more likely you are to maximize your itemized deductions for that year. When planned carefully and done right, bunching can be an advantageous strategy. However, consolidating your donations can be difficult, so consider connecting with a financial professional before making these decisions.3
Use an IRA
You are likely familiar with an Individual Retirement Account (IRA) as a means to save for retirement, but you can also use your IRA to make charitable distributions. To do this, you have to be at least 70½ years old and the donation must be distributed directly from the IRA by the holder or trustee. The maximum IRA distribution is $100,000 and married couples can distribute up to $200,000. The benefit of an IRA charitable distribution is that they are not federally taxable, or state taxable in Minnesota and Wisconsin. Money taken out and gifted will also count toward your IRA required minimum distribution.
Create a Charitable Remainder Unitrust
One way you can make charitable donations without significantly reducing your income stream is through a Charitable Remainder Trust (CRT). A type of CRT, a Charitable Remainder Unitrust (CRUT) allows donors to transfer cash or assets into a trust. In short, the beneficiary of the CRUT receives a certain percentage of the trust’s value, while another percentage of the value must be donated to a charitable organization. CRUTs are particularly beneficial vehicles for giving because they can provide cash flow to you while still providing an important charitable income tax deduction.
Re-Evaluate Your Strategies
Overall, in higher-income years, you may consider increasing your philanthropic reach. In contrast, if you struggle financially one year, you may wish to scale back your donations to charities. It’s important to note that while donating assets such as real estate and stocks is common, cash is still the most convenient way to give and allows the charity you care about to spend your gifts with complete freedom. In the same way you review your financial plan and taxes each year, you should evaluate your charitable donations and strategies annually as well.
Work with Trust Point
Ultimately, it’s important to remember that when giving your money to a charity, the organization and its mission should benefit first. Whether you are unsure of how or where to give, Trust Point can help. We offer a variety of charitable giving and trust services that will make sure you meet your philanthropic goals. To learn more, call 800-658-9474.
