When establishing your long-term giving strategy, Lauer says it’s helpful to ask yourself the following questions:
- How much do I want to give?
- When do I want to give?
- Am I planning a one-time or annual donation?
- To what charity or charities do I want to donate?
Answering these questions will make it easier to determine the giving strategy that’s right for you. Below are three popular strategies that can offer charitable-giving benefits to you.
1. Qualified charitable distributions
If you’re 72 or older and have a Traditional IRA, you’re required to take annual distributions that are treated as taxable income. A qualified charitable distribution, Lauer says, allows you to elect for that annual distribution—up to $100,000 per year—to go to a charitable organization instead. This direct payment from your IRA to the public charity not only helps the organization’s cause, but also may reduce your taxable income as you will not pay taxes on the amount that was distributed to the charity. As you do not pay taxes on the charitable distribution, no charitable deduction is permitted.
2. Donor-advised fund
A donor-advised fund is a charitable account you establish with a financial institution or perhaps a local community foundation. You can contribute cash, stock, and possibly other assets depending on the fund. You receive an upfront tax deduction when you establish and contribute to a donor-advised fund. With this charitable giving strategy, Lauer says, you can decide when to advise the fund administrator to make distributions to your charity (or charities) of choice. There’s no specific period of time before the fund must issue checks to your favorite charities so it offers some flexibility for your charitable giving program. The donor-advised fund is sometimes viewed as a simpler strategy than establishing your own private foundation. There are key differences between a donor-advised fund and a private foundation, including administrative responsibilities and tax deduction limits as a percentage of your adjusted gross income.
3. Charitable remainder trust
This strategy may be ideal for higher-net-worth individuals with portfolios including securities that have appreciated in value, Lauer says. Here’s how it works: You make a contribution to the irrevocable charitable trust (drafted by your attorney), and the trust pays you back an income stream during the trust term as specified in the document. The charity of your choice receives the remaining balance at the end of the trust term. This strategy enables you to take a portion of your portfolio that isn’t paying out large dividends, Lauer says, and create an income stream and a potential tax deduction and benefit your favorite charitable cause. (Note that the amount of the tax deduction will be less than the contribution due to the retained income stream.)
When you’re making annual gifts to charities, it may be better to give long-term appreciated securities instead of cash, Lauer says. That’s because when you donate securities owned for more than one year, you may receive a tax deduction for the full amount—plus you do not have to realize capital gains.
Whatever charitable giving strategy you choose, Lauer says, remember to review your donations when you revisit your overall investment plan each year. “Any charitable giving that you do affects your long-term plan and your annual budget,” she says. With the new tax law, it is also important to review the amount of your gifts with your CPA so you’re aware of any tax implications.