You’ve no doubt heard inspiring stories about people who ran huge companies and amassed great wealth during their working years but are remembered today for how much of it they gave away. From Andrew Carnegie to Bill Gates, it has been a common theme.
Maybe you’re not in a position to have a concert hall named after you. Maybe you won’t be the one to eradicate malaria. But if you’ve prospered in your life, you might very well be experiencing this same motivation to leave the world a better place.
Fortunately, the U.S. tax code offers a number of ways to support this worthy ambition of yours. In the world of wealth management, we call this Charitable Planning.
Philanthropic planning strategies
Every individual’s financial situation is as unique as the array of causes that resonates with them. But once a financial advisor has a firm grasp on a client’s income, assets, expenses, and tax treatment, the possibilities begin to present themselves.
The primary goal is to fund projects about which you’re passionate. How you choose to do that depends on how pursuing that can coincide with the goals manifested in your financial situation. That’s the difference between charitable giving and charitable planning. Here are a few charitable planning strategies that could benefit you and the causes you support.
- Donating low-cost basis stock. Say for example your immediate financial goal is tax avoidance. In that case, donating low-cost basis stock is a classic planning strategy. If you bought a stock at $1/share and it’s now worth $10/share, you can sell it and donate cash, but you’d have to pay capital gains tax. Instead, giving appreciated stock to your favorite charity is a non-taxable event.
- Qualified charitable distribution (QCD). But maybe your finances require you to lower your annual gross income. To accomplish that, you might want to look into a qualified charitable distribution (QCD). Once you’ve reached the age of 70 1/2, you can elect to send distributions of up to $100,000 straight to a 501(c)(3), and then those dollars are invisible when it comes to calculating your income. This move can insulate you from falling into a higher tax bracket and having to pay higher Medicare premiums.
- Bunching. Another strategy for taxes and donations is bunching, which takes advantage of the rules governing charitable deductions. Giving two years’ worth of cash gifts in a single tax year, then following that up with a year of no gifting, often affords you more favorable treatment. In the year when you donate, you get to take the itemized deduction then, in the following year, you can take the standard deduction.
- Donor-advised funds. However, donor-advised funds might be the best vehicles for many individuals, specifically those who haven’t decided how much to apportion to each cause, or perhaps even which causes they want to support. A DAF is like your own mini-charitable foundation, which has tax advantages over being an individual giver. Other benefits of employing charitable planning strategies include flexibility with the types of assets to contribute, administrative convenience, and cost savings.
Not all these vehicles work for everyone. They each have disadvantages as well as advantages. DAFs, for example, are run by governing boards, not the donor directly. It’s unlikely but conceivable that board members can ignore the donor’s direction on how the funds are to be allocated.
If you want more details on the most tax-efficient way to provide for your favorite charities, it’s worth spending a little time with a financial advisor who can walk you through the options.