How to Increase Your Impact and Reduce Your Taxable Income
October 25, 2023
At a time when the world feels uncertain, and we grapple with what is happening in Israel, around the world, and here at home, it is the power of uniting as a community that gives me hope for a brighter future. Our community is resilient and determined to make a positive impact in the face of challenging times.
When the year comes to a close, many people choose to make charitable contributions. As you designate recipients of your charitable support, I would like to share some strategies to increase your impact and even reduce your taxable income.
Before writing your next check to your favorite charity (JFS), check out these four useful tips for smarter giving from Fidelity Charitable:
Discover your mission – When your giving has a clear purpose, it becomes more satisfying, focused and effective. If you haven’t already done so, create a personal charitable mission statement to guide your giving.
Create an action plan – Once you’ve identified what’s most important to you through the creation of a charitable mission statement, it’s time to decide how you can really make an impact on the causes you care about through a detailed action plan.
Choose the right nonprofits – Most donors will achieve their charitable mission by supporting nonprofit organizations working on the problems and issues they care about.
Amplify your impact – Giving is very personal. But it can also be more fun and more effective if we connect with others who share our goals. Similarly, engaging your children or other family members in giving can be a wonderful way to reinforce shared values and create strong connections between generations.
Knowing why and how you want to give is foundational work for philanthropic families. Going a step further, consider these eight tax-smart charitable giving tips from Schwab Charitable:
Donate appreciated assets rather than cash – By donating appreciated stocks, real estate and other noncash assets held for more than one year, donors generally can eliminate the capital gains tax they would otherwise incur if they sold the assets and donated the sales proceeds. Donors who itemize deductions when filing their tax returns may also claim a charitable deduction for the fair market value of the assets. Eliminating the capital gains tax can increase the amount available for charities and increase the deduction amount.
Donate private business interests – Publicly traded stocks are usually the “noncash assets” donated to charity, but donors might own interests in a C corporation, limited partnership (LP) or limited liability company (LLC) that could make good charitable gifts. This is especially true if the interests have been held for more than one year, appreciated significantly over time and retained more value than other assets owned by donors. Similar to donating publicly traded stocks, giving a percentage of a privately held business interest can generally eliminate the long-term capital gains tax a donor would otherwise incur if they sold the assets first and donated the proceeds.
Bunch multiple years of charitable contributions into 2023 – Some donors may find that the total of their itemized deductions in 2023 will be slightly below their standard deduction amount. In that situation, it could be beneficial to combine or “bunch” 2023 and 2024 tax year contributions into one tax year (2023), itemize on their 2023 tax return and take the standard deduction on 2024 taxes. Going even further, bunching three or more years of contributions together may further increase a donor’s tax savings.
Rebalance your portfolio via asset donation – Rebalancing a taxable investment portfolio often involves selling appreciated investments that have exceeded target allocations and using sale proceeds to buy more of the assets that have become underrepresented in a portfolio (i.e., selling stocks and buying bonds). Donors can use a part-gift, part-sale strategy to potentially reduce the tax impact of rebalancing. They can accomplish this by claiming an itemized charitable deduction for donating long-term appreciated assets in an amount that offsets the capital gains tax on selling appreciated assets.
Use a traditional IRA for charitable donations when taking mandatory distributions – Individuals aged 70½ and older can direct qualified charitable distributions (QCDs) of up to $100,000 per year from their traditional IRAs to qualifying public charities as defined by Internal Revenue Code section 170(b)(1)(A) and reduce their taxable income. “Qualifying public charities” in this case typically exclude donor-advised funds and private foundations.
Starting in 2023, donors can also direct a one-time $50,000 QCD to a charitable remainder trust (CRT) or charitable gift annuity (CGA) as part of recently passed SECURE Act 2.0 legislation. A QCD can satisfy all or part of a donor’s annual required minimum distribution (RMD), is not taxable income for the donor and does not qualify for a charitable deduction.
Note that married couples who submit joint tax returns each qualify for an annual QCD of up to $100,000, for a potential total of $200,000, and the SECURE Act 2.0 mandates annual inflation-based adjustments of the QCD limit starting in 2024.
Leave a legacy by naming a charity as a beneficiary of IRA assets – A unique feature of traditional IRAs is that heirs pay income taxes on the inherited assets at their own income tax rate at the time of withdrawal. This is why public charities can be ideal beneficiaries of traditional IRA assets. Public charities do not pay tax on traditional IRA income, which means every penny of the donation can be directed to support the donor’s charitable goals beyond their lifetime. What’s more, donors can ask their advisors about using IRA assets after their lifetimes to fund a charitable remainder trust, which will combine a gift to charity with income to heirs.
Establish a charitable trust – There is more than one type of charitable trust donors can use, but we’ll focus here on a charitable remainder trust (CRT). A CRT is an irrevocable giving vehicle funded with a gift of cash or noncash assets where income beneficiaries receive payments from the CRT for a term of years or life and a public charity receives the remaining assets at the end of the term. The donor may claim a charitable deduction if they itemize in the year the CRT is funded, and the deduction amount is typically based on the present value of the assets that will eventually go to the named charity at the end of the term.
Use a donor-advised fund (DAF) – A donor-advised fund (DAF) is a public charity, and contributions of cash and noncash assets are eligible for charitable deductions if a donor itemizes.
It’s a threefold proposition: contribute, invest, and grant. Contributed assets may be invested for potential tax-free growth, and donors can recommend grants from their accounts to other public charities of their choice at any time. DAF accounts also can be a charitable beneficiary of IRA assets or be the named remainder beneficiary of a charitable trust.
It’s important to begin communicating and working with your financial firms and advisors soon so you can make sure to meet the December 31 deadline for your 2023 charitable donations. Here is a table showing the deadline for JFS to successfully process the receipt of any donations you might make this year.
|Stock||Stock donations must arrive in JFS brokerage accounts by December 29.|
|Electronic Bank Transfer||Funds must be received by December 29.|
|Wire Transfer||Funds must be received by December 29.|
|Credit Card||Credit card donations must be processed by JFS by 11:59pm PT on December 31.|
|Check||Mail must be postmarked by the U.S. Post Office by December 31.|
I hope you find this information useful as you contemplate how to support others through year-end and legacy giving. For questions and additional resources, I encourage you to reach out to Lacey Lee, JFS Director of Planned Giving, at (858) 637-3217.
Learn more at www.JFSLegacy.org.
Together, we can create a stronger and healthier community where everyone can thrive.
Moving Forward Together,
Ryan Goldenhar, CFA®, CFP®
Co-Founder/Financial Advisor at Wealth With Options
JFS Board Director
Ryan Goldenhar, CFA®, CFP® offers investment advisory services through Mariner Platform Solutions (MPS), an SEC registered investment adviser. MPS is not affiliated with Wealth With Options or JFS.
This communication is provided for informational and educational purposes only and is not personalized advice or a recommendation to engage in any particular strategy. This information is not a substitute for specific individualized tax, legal, financial, or investment advice. Where specific advice is necessary or appropriate, we recommend that you consult with a qualified professional.