Is there a way for you to get a double tax benefit from your charitable giving?
Many people want to be charitable with their money. There are different ways to be charitable and the government treats each differently tax-wise.
You can write a check to a charity, but you only get to write it off if you itemize your deductions on your tax return. In 2024, the standard deduction for a single filer is $14,600 and it's $29,200 for married filing jointly. When you itemize your taxes, if your deductions don’t add up to be more than the standard deduction, using the standard deduction would be more advantageous. This means you’re not really getting credit for writing off your charitable giving.
One of the best ways to use the standard deduction and get to right off your charitable giving is to do a qualified charitable distribution or a QCD. You must be 70 1/2 years old or over and you can give the gift directly from your IRA to the charity. You will get a 1099 at the end of the year showing the taxable distribution, and you will need to match it up with a statement from the charity to prove that you gave it to the charity. Your custodian doesn’t know it was a charitable gift, so they send out the 1099 as if it’s taxable and it’s your responsibility to give the correct paperwork to your tax preparer to make sure you don’t pay taxes on it. But with the qualified charitable distribution, you can take the standard deduction and give money directly from your IRA up to $100,000 a year and thereby claim both benefits of the standard deduction benefit and the charitable gift as well.
Another way to give money away and potentially get a tax benefit is using a donor-advised fund. Here’s how this works -- you set up a donor-advised fund and give your gift there. Let’s say you gave $100,000 to the donor-advised fund. You can take the income tax deduction in the year that the gift happens. Once it’s in the donor-advised fund, you can distribute it to a charity whenever you want. It does not have to be distributed in the same year. Keep in mind the tax deduction happens when you make the gift. With the donor-advised fund, the gift can be cash or non-cash assets.
There are no limits to the amount of gifts that you can give. The gifts are irrevocable, meaning they must go to a public 501(c)3 and cannot be taken back once gifted. The account that you set up has to be titled as a donor-advised fund.
There are some limits on the tax deductibility of the gift. You can do up to 60% of your adjusted gross income if you do a cash gift. If you choose to give away a non-cash asset, it can be up to 30% of adjusted gross income.
There are carry forward allowances so gifts can be carried forward for up to five years. In our example of someone having $100,000 of adjusted gross income and giving a $100,000 cash gift, they can only write off 60% of the gift in that first year of $60,000. The following year they could use the rest of the carry forward until they have used it up. You have five years to use up that carry-forward amount and to get this deduction, you must itemize your deductions on your taxes. So the deductions need to be higher than the standard deduction.
With cash, you can write a check and send it to the donor-advised fund. But for an additional potential tax benefit, let’s talk about gifting highly appreciated assets. In our example, you have $100,000 of highly appreciated Amazon stock that you bought for $10,000. If you sold it and realized the gain, you would owe $16,920. That’s the $90,000 profit times 18.8% for long-term capital gains. If you gift this stock to the donor-advanced fund, you can give the full $100,000 and not owe the $17,000 in taxes. That’s tax benefit number one.
The other great thing is that the gift to the donor-advised fund of $100,000 means you get to take a $100,000 deduction on the current year's tax return. Let’s say you'll be in the 24% tax bracket and you lower your taxable income by $100,000 and therefore you’re not paying taxes on one hundred thousand dollars of your other income at a 24% rate, so that’s $24,000 in taxes saved. So you eliminated around $17,000 of taxes and lowered your current year's tax due amount by $24,000 to get the double benefit.
The information provided is not intended as tax or legal advice. Figures shown are for illustrative purposes only furthermore, the information nor the illustrations provided may not be used to avoid any tax penalties. This content represents the general views of Christy Capital Management and should not be regarded as personalized investment advice Nothing herein is intended to be a recommendation. The opinions expressed are subject to change without notice. Retirement Benefits Institute, Inc., and a portion of its contents merged with Christy Capital Management Inc. Brandon Christy, former President of Retirement Benefits Institute, is also the current President of Christy Capital Management, Inc., a registered investment adviser.
