Financial Focus: Consider tax-smart charitable gifts
As we enter the annual season of giving, you might be thinking of charities you wish to support. But you also might be wondering how to gain some tax benefits from your gifts.
It used to be pretty straightforward: You wrote a check to a charity and then deducted the amount of the gift, within limits, from your taxes. But a few years ago, as part of tax law changes, the standard deduction was raised significantly, so fewer people were able to itemize deductions. Consequently, there was less financial incentive to make charitable gifts.
Of course, this didn’t entirely stop people from making them. And it’s still possible to gain some tax advantages, too.
Here are a few tax-smart charitable giving strategies:
Bunch your charitable gifts into one year
If you combine a few years’ worth of charitable gifts in a single year, you could surpass the standard deduction amount and then itemize deductions for that year. In the years following, you could revert to taking the standard deduction.
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Make qualified charitable distributions
Once you turn 73 (or 75 if you were born in 1960 or later), you must start taking withdrawals from your traditional or inherited IRA. These withdrawals — technically called required minimum distributions — are taxable at your income tax rate, so, if the amounts are large enough, they could push you into a higher tax bracket or cause you to pay larger Medicare premiums.
But if you donate these required minimum distributions directly to a qualified charity, you can avoid the taxes. And because these donations, known as qualified charitable distributions, will reduce the balance on your IRA, you may have lower required minimum distributions in the future.
Of course, if you need some or all your required minimum distributions to help sustain yourself in retirement, the use of qualified charitable distributions may not be of interest to you. Keep in mind, though, that you can start making qualified charitable distributions at 70½, even before you must start taking the required minimum distributions. qualified charitable distributions up to $105,000 can be taken in 2024.
Consider a donor-advised fund
If you’re interested in a long-term charitable giving arrangement, you might want to consider establishing a donor-advised fund. You can put many types of assets into this fund, and then direct it to make grants periodically to the charities you’ve chosen. You get an immediate tax deduction for your contribution, and, if you donate appreciated assets, such as stocks, you’ll avoid the capital gains taxes you would have incurred if you simply sold the stocks and then gave the money to the charities. One note of caution, though — your contributions to a donor-advised fund are irrevocable, and once the assets are in the fund, you can’t use them for anything except charitable giving.
These strategies — qualified charitable distributions and donor-advised funds in particular — can be complex and involve several issues of which you should be aware. So, you should consult your tax advisor before taking action. But if any of these techniques are appropriate for your situation, give them some thought — because helping a charitable group and getting tax benefits for doing so is a “win” for everyone.
This article was written for use by Edward Jones financial advisers. Edward Jones and its associates and financial advisers do not provide tax or legal advice. Bret Hooper, Kevin Brubeck, Charlie Wick, Jeremy Lepore, Jessie Steinmetz, Ben Dodd and Mark Eaton are financial advisers with Edward Jones Investments and can be reached in Edwards at 970-446-0992, in Eagle at 970-328-0361, 970-328-0639 or 970-328-4959, and in Avon at 970-688-5420.
