‘Tis the Season… Part 1: Charitable Gifting

By Kimberly I. McCarthy, Esq.
Senior Vice President and Chief Wealth Client Services Officer
Washington Trust Wealth Management

With the holidays and year-end approaching, ‘tis the season to focus on giving – and taxes! Here are three quick strategies to help you maximize your charitable giving and minimize your tax burden.

“Bunching and Batching”

Bunching and batching means consolidating your charitable donations for multiple years into a single tax year. Bunching and batching enables you to plan around the current historically high standard deduction threshold ($27,700 for filing jointly and $13,850 for individuals filing single, with an additional $1,850 per person over 65). It is tax efficient for many clients to bunch/batch gifting and itemizing deductions in one year and take the standard deduction the next year, such as making significant charitable gifts in a high-income year and taking the standard deduction in lower income years.

The major downside to bunching and batching is that many charitably minded folks want to support their favorite charities every year, not just when it is tax efficient. One powerful strategy to get the best of bunching/batching with the freedom to make charitable gifts on your own terms is to leverage a Donor-Advised Fund (DAF).

Here’s how it works: Once you open a DAF, you can bunch/batch two or more years of contributions to a DAF in one tax year. You will immediately receive the tax deduction in that year, but don’t have to make all the charitable gifts in that year. Instead, you can distribute the funds to charities of your choice over time, in the amounts and on the schedule you prefer. An extra bonus: with a DAF, you only have to track the original donation, not each grant to individual charities, for your reporting to the IRS.

Example:

A couple typically donates $15,000 per year to charity but don’t itemize on Schedule A because their annual giving and other itemized deductions are below the standard deduction threshold ($27,700). As a result, they get no tax benefit from their annual charitable donations. If instead they fund a DAF this year with five years’ worth of donations ($75,000), they can take the $75,000 deduction this year and distribute those amounts as they wish over the coming years.

Low Basis Stock Donations

Donating low-basis stock directly to a DAF or charity is an excellent way to make your gifting tax-efficient by using two tax saving strategies in one donation. If you have held the stock for more than a year, gifting it to a charity allows you to avoid paying capital gains tax on the appreciation while still receiving a charitable deduction equal to the stock's current market value. And the charity will love it, too: they can sell the stock and receive the full value without reduction for taxes. This strategy also presents an opportunity to rebalance your investment portfolios, potentially enhancing overall diversification and managing risk.

Remember that gifting low basis stock is a strategy best suited for gifting to charity, not friends/family. More on that coming on December 21: ’Tis the Season … for Tax-Efficient Gifting (Part II: Family Gifting).

Qualified Charitable Distributions (QCDs)

For investors who are 70½ years or older and have (or are beneficiaries of) individual retirement accounts (IRAs), making Qualified Charitable Distributions (QCDs) can be a tax-efficient way to support charitable causes.

A QCD is a transfer of funds from your IRA directly to a qualifying tax-exempt organization. As we have discussed in the past [LINKS here], depending on your situation, a QCD can have several tax benefits. For example, if you are in RMD status and time the QCD correctly, you can satisfy your RMD, up to $100,000 per taxpayer per year while excluding the distributed amount from taxable income.ⁱ

Excluding QCDs from taxable income may provide additional benefits, such as a lower Adjusted Gross Income (AGI), potentially impacting the taxation of Social Security benefits and Income Related Monthly Adjustment Amount (IRMAA) adjustment to Medicare premiums.

Coming on December 21: ’Tis the Season … for Tax-Efficient Gifting (Part II: Family Gifting)

Washington Trust Wealth Management Can Help

As you plan your charitable giving, the wealth advisors at Washington Trust Wealth Management can tailor tax-efficient strategies to your unique financial situation and goals, and determine which strategies work best in your customized financial plan.