It may be hard to believe, but the holiday season is here, which means many Americans are planning to donate to their favorite charities in the coming months, so we’d like to remind you that there are two creative ways to donate to charity while still maximizing tax advantages:
Using your RMDs
If you have a traditional IRA, you must take required minimum distributions (RMDs) at age 72 or incur a penalty. You will also pay normal income taxes on this distribution. However, if you choose not to itemize your tax deductions for the current tax year, you may use some or all of your RMD (up to $100,0000) as a qualified charitable distribution (QCD). Your RMDs, rather than being taxed as normal income, get donated to the charity. Win-win for all involved, as you reduce your tax burden while the charity receives your donation.
Cluster Your Charitable Contributions
If you are not in your RMD stage of life, wish to donate to charity, and prefer to itemize your tax deductions, you can lump your charitable contributions into a single tax year.
For example, consider a married couple with no mortgage, making $5,000 in annual charitable contributions and a SALT deduction capped at $10,000. In this case, they will likely use the standard deduction of $25,900 and not itemize their tax return. They would, therefore, not receive any specific tax benefit from their charitable contributions. If they chose to cluster their charitable contributions, they could elect to make a few years of contributions all in a single year. For example, they could make five years of charitable contributions ($25,000) in a single year and choose to itemize their tax return in that year and use the standard deduction in all of the other years.
The biggest drawback to clustering is that most individuals want to maintain regular contributions over those five years rather than give in a single lump sum. A donor-advised fund (DAF) may be beneficial if that is your preference. A DAF works like this:
- You make an irrevocable contribution of personal assets to the fund, including cash, stocks, or other assets.
- You immediately receive an itemized tax deduction for the current tax year based on your contribution ($25,000, for example).
- You name your donor-advised fund account, advisors, and any successors or charitable beneficiaries.
- Your contribution is placed into a donor-advised find account where it can be invested and grow tax-free.
- Afterward, you can distribute grants from your account to qualified charities.
Remember that you may only itemize your contributions into the fund, not distributions out of the fund. If you are interested in exploring methods for charitable giving, feel free to contact us to discuss which options may be best for your specific situation.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice. Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.