Fueling a philanthropy that meets financial strategy, tax efficient giving enables the individual and business to make significant contributions to the causes they care about while optimizing tax outcomes. Donor-Advised Funds (DAFs) and Qualified Charitable Distributions (QCDs) can become cornerstone in your strategic tax planning and allows your community to benefit as well. Understanding how to structure a tax-efficient charity plan can lead to significant tax savings while supporting your favorite causes.
Understanding Tax-Efficient Charitable Giving
Tax-efficient charitable giving means using tax advantaged strategies and tools to maximize the financial benefits of your donations. Methods like Donor Advised Funds and Qualified Charitable Distributions help reduce a donor’s tax liability while enabling giving to create a lasting impact.
Donor-Advised Funds (DAFs)
A Donor Advised Fund (DAF) is a charitable investment account that is specifically designed for philanthropic purposes. The account is funded by donated amounts that donors receive an immediate tax deduction for. Over time they can recommend grants to qualified charitable organizations. You can make donations when it is most advantageous to your tax situation with DAFs.
Qualified Charitable Distributions (QCDs)
Qualified Charitable Distributions (QCDs) are contributions by ages 70½ or older from a person’s Individual Retirement Accounts (IRA) directly to a qualified charity. This is a Required Minimum Distribution (RMD) donation, excluded from taxable income, serving as a tool for minimizing tax burdens.
How Donor-Advised Funds and Qualified Charitable Distributions Can Save You Money
Immediate Tax Deductions
When you donate to a DAF, you receive an immediate tax deduction for the year in which the donation is made, and the grants can be taken out in the following years. Strategic tax planning in this regard lets donors strategize for reduced taxable income by front loading contributions to high income years.
Avoiding Capital Gains Tax
Donating appreciated securities directly to a DAF allows you to avoid capital gains taxes on such assets if you otherwise sold them. Using this method maximizes your donation’s value, enhances the likelihood of tax savings and lowers your total tax burden overall.
Lowering Taxable Income with QCDs
Directly donating from an IRA to a qualified charity enables retirees to lower their taxable income by up to $100,000 annually through QCDs. These distributions are not included in taxable income and therefore they decrease AGI (adjusted gross income) and possibly lower taxes on Social Security benefits and Medicare premiums.
Satisfying RMD Requirements
QCDs can satisfy the Required Minimum Distribution (RMD) requirement for people over 70½ without increasing taxable income. The dual benefit of this strategy provides donors with a tax efficient charity strategy and meets IRS requirements to support charitable organizations.
Flexibility in Charitable Contributions
The flexibility that DAFs provide, in which donations are made when it is most financially beneficial and the funds are then granted to charities over time, is unmatched. This feature has strategic timing and allows donors to align giving with other financial goals.
Strategic Timing of Donations
DAFs and QCDs permit donors to time contributions to the most tax advantaged window. For example, donating large sums towards years when income is unusually high can yield larger deductions, so these tools are invaluable for strategic tax planning.
Simplified Record-Keeping
DAFs do this by lumping together several donations into one transaction. During tax season, the simplification is especially helpful, because donors only require documentation from the DAF provider instead of tracking down individual donation receipts.
Enhanced Impact of Donations
Sometimes, donors to TEFs and NGOs can use DAFs and QCDs to achieve tax savings that enable them to give way more generously than they ever expected. As this benefits charitable causes and strengthens the donor’s philanthropic legacy it also benefits the donor.
Legacy Planning
DAFs provide a structured means towards legacy planning in which donors include family members in philanthropy. Contributions can continue over multiple generations, and continue to support a tax efficient charity approach while fostering a culture of giving.
Supporting Strategic Tax Planning
By utilizing DAFs and QCDs in your financial plan, you actually take a holistic approach towards tax management. Charitable giving can be aligned with tax optimization goals for the long term financial sustainability and the maximization of tax savings.
Conclusion
At 406 Consulting, we concentrate our efforts in helping businesses and individuals navigate the complexities of charitable giving; so as to benefit from the tax savings and support carrying out impactful philanthropy. Having such experience allows us to see how strategic tax planning can position you for maximum philanthropic gains, while still keeping business matters practical.
Interested in taking advantage of the benefits of tax efficient charity? Get in touch with us today and let us help you create a charitable giving strategy that puts your bottom line in alignment with your passion for a cause.
