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Tax-Smart Ways to Give to Charity

May 4th, 2023 | 2 min. read

By Jacob Schroeder

charity tax form

The famously wealthy business tycoons Bill Gates and Warren Buffett say they will not leave their kids an inheritance. While you might not have billions to give away, your legacy plans may also involve something other than leaving money to your kids.

At Advance Capital Management, we know that everyone has different life situations that impact how we want our wealth to be used after we’re gone.

Some of our clients simply give their financial assets directly to their children. While to some clients, the thought of leaving money outright to their children may not align with their own values regarding work ethic and the belief that children should build their own wealth. Meanwhile, clients without children may want to pass on an inheritance to other family members or leave a charitable legacy.

Whatever your situation, you want to do the right thing. If the right thing is not to give an inheritance to your kids, here are some tax-smart ways to give to charity instead.

This article covers the following ways to pass on wealth to your favorite causes:

  • Donating cash
  • Giving appreciated investments and property
  • Making qualified charitable distributions
  • Using donor-advised funds

Leaving an inheritance to charity

An effective way to leave a legacy other than to your children is to use your wealth to advance causes you care about.

There are a variety of ways to make a charitable gift, ranging from the very simple to more complex. The most common strategy is to make direct, immediate donations, whether from writing a check or transferring it from a qualified retirement account.

Always make sure the non-profit organization is a 501(c)(3) public charity or private foundation. Also, get a receipt. When it comes to giving charitable gifts in excess of $250, a paper trail is required.

Donating cash

By donating cash, you receive a tax deduction for the total amount, up to 60% of your adjusted gross income.

Giving appreciated investments and property

A gift of appreciated investments or appreciated property (real estate, art, automobiles, etc.) held for more than one year allows you to deduct the fair market value on your income tax return and avoid recognition of capital gains.

Making qualified charitable distributions

A qualified charitable distribution allows IRA owners who are 70 ½ or older to transfer up to $100,000 a year directly from their IRA to charity. That transfer is excluded from the IRA owner’s income and, if done correctly, counts toward the owner’s required minimum distribution upon reaching RMD age.

The key is that the distribution is directly transferred to the charity. That means, if the IRA custodian makes a check payable to the IRA owner who then endorses the check to a charity, it is not qualified.

Using donor-advised funds

High-income earners who are younger than age 70 ½ and those with appreciated assets in non-IRA accounts may want to consider contributing to a donor-advised fund (DAF).

A DAF is similar to an IRA or brokerage account in that you invest money in the account. You then make contributions to your charities of choice as usual but with the money from the DAF. It can be funded with cash and/or securities. Since the DAF itself is considered a charity, you get to include the entire contribution on your Schedule A, the income tax form used by taxpayers to report itemized deductions.

Therefore, a DAF lets you bundle multiple years of charitable deductions at once to help you surpass the standard deduction threshold. An even greater benefit is derived from funding it with appreciated securities, as those earnings will never be taxed since the investments were donated.

The bottom line

It’s important to recognize that there are various ways to make charitable gifts, and they don’t make sense for all donors. You support the causes you love without any mistakes by working with a financial adviser to ensure you make donations properly and maximize your tax deductions.

LEARN MORE! This free guide can help you start building your financial legacy. You’ll learn about 8 common ways to effectively pass on wealth. Download it now:

PassingOnWealthEbook-cover-min-1Download the Passing On Your Wealth Ebook