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5 Charitable Giving Strategies to Maximize Your Impact and Reduce Tax Liability

5 Charitable Giving Strategies to Maximize Your Impact and Reduce Tax Liability

November 15, 2022
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Annual giving empowers you to use your financial means for good. But there are giving strategies that allow you to give while also potentially reducing your tax liability. 

IN THIS ARTICLE:

  • A donor-advised fund (DAF) is a fund set up through a sponsoring organization that allows you to give to your favorite charities while also offering potential federal and state tax deductions.
  • Gifting appreciated shares to charity, rather than cash, can potentially offer a bigger tax benefit.
  • You can help meet your required minimum deductions on certain retirement accounts by donating portions to qualified nonprofits — tax-free.
  • In 2022, you can give up to $16,000 per recipient without triggering the gift tax.
  • Contributing to a 529 plan now can offer future tax benefits when the funds are used for educational purposes.

As you plan your charitable giving for the year, here are 5 strategies to maximize both your impact and your tax benefits.

Set up a donor-advised fund.

Is philanthropy one of your core values? If so, a donor-advised fund (DAF) may be a great option for you.

A DAF is a fund set up through a sponsoring organization, like a community foundation or a financial service company, that allows you to give to your favorite charities while also offering potential federal and state tax deductions. 

Personal assets, like cash, stock, and real estate, can be contributed to your DAF as often as you’d like. You can then recommend grants from your fund to your favorite charities whenever it best suits those organizations. For example, you can give to your DAF in 2022 and take the charitable deduction for that tax year, then recommend a grant to a qualifying nonprofit in the following year. 

Each sponsoring organization has different requirements for a minimum contribution to start your DAF. When you work with a Landmark Financial advisor, we can help you set up your DAF.

Gift your appreciated shares to charity.

Wanting to donate to your favorite charity this year? You may experience a bigger tax benefit by donating your appreciated shares rather than just cash.

The reason? Three words: capital gains tax.

For example, let’s say that you want to donate $60,000 to a charity. You could donate this in cash, and generally take this as a regular charitable deduction.

However, if you donate this same $60,000 as an appreciated security you’ve owned for more than a year, you can avoid paying the capital gains tax on this investment. So if you originally purchased the stock for $20,000, you avoid paying tax on the $40,000 gain while also deducting the current fair market value of $60,000 as a charitable donation. 

Your charity of choice gets a much-needed financial boost, while you also get to reduce your tax liability in multiple ways. It’s a win for everyone.

Donate your required minimum deduction to your favorite nonprofit.

Many types of retirement plans require a minimum annual deduction (known as a required minimum deduction, or RMD) if you are age 72 or older.

Plans with RMDs include:

  • Traditional IRAs
  • SEP IRAs
  • SIMPLE IRAs
  • 401(k) plans
  • 403(b) plans
  • 457(b) plans
  • Profit sharing plans
  • Other defined contribution plans

Your RMD is considered taxable income. However, anyone aged 70 ½ and older can make tax-free distributions of up to $100,000 annually to qualified nonprofits. The good news? It will count toward your RMD. For example, if you donate $10,000 to a qualified charity, and your RMD is $20,000 each year, you’ll only need to pay tax on the additional $10,000 required withdrawal.

Take advantage of the annual exclusion for gifts.

Is your estate subject to estate taxes? If so, you can begin to transfer wealth now by taking advantage of the annual exclusion for gifts. 

In 2022, you can give up to $16,000 — per recipient, not total! — without being required to pay the gift tax. So if you have children or other recipients you’d like to see benefit from your wealth, consider gifting them each $16,000 this year — tax-free.

Contribute to a 529 plan.

If you’re planning for your child’s future education, a 529 plan is an investment account that can offer tax benefits when used for qualified education expenses. And it’s not just college that you can use a 529 plan for — funds can also pay for K - 12 tuition and more.

Like a Roth 401(k), you contribute after-tax funds to your 529 plan. Then, these funds can be withdrawn without being taxed if used for qualified educational expenses.

While contributions to a 529 plan do not qualify for a federal income tax deduction, you may see a state tax benefit depending on where you call home. In 2022, nearly all states (36, to be exact) offer tax deductions for 529 plan contributions.

Maximize your impact and your tax benefits by working with a Landmark Financial advisor.

Get in touch with our Landmark Financial advisors to formulate the best charitable giving strategy for you.