Yes! You can still get tax benefits from charitable giving in 2024. With the higher standard deduction, you may have seen your charitable efforts have a reduced or no benefit on your taxes in recent years. However, it’s still possible for your generosity to save money on taxes. It just may require a little more planning.
The optimal charitable giving strategy depends on your age and type of investment accounts.
No taxable brokerage accounts / under age 70.5
If you’re like most people, your charitable giving each year isn’t enough to itemize. However, if you bunch several years of donations together in one year, it may exceed the standard deduction. But it’s not a lot of fun to give all your money one year and then withhold gifts in future years. My new preferred approach is to use a donor advised fund (DAF). You can donate enough money for multiple years of donations, take your deduction, and then grant the money out of the donor advised fund to your charities over the upcoming years. Schwab provides a great bunching and tax savings calculator to see if this would benefit you. We describe the ins and outs of a donor advised fund here.
Taxable brokerage account / under age 70.5
If you have a taxable investment account with appreciated positions you’ve held for more than a year, use them to fund your donor advised fund. Subject to limitations, you receive a tax deduction for the full market value of the donated positions without ever paying tax on the capital gains. Then, in your taxable investment account, you can repurchase the investment you just donated with the cash you were going to donate to charity.
Even if the donation of appreciated securities is not big enough to itemize, there’s still a benefit to using this strategy! You are resetting the cost basis of your investments to today’s market value, vs. what you originally paid for the investment. If you sell this position in your taxable brokerage account in the future, you will pay less in capital gains tax because you reset your cost basis higher. The only cost to you is the donor advised fund management fee (usually 0.6% annually at Vanguard, Fidelity and Schwab for just the balance held in the DAF over the course of the year) and the time it takes you to make the donation and process the gifts from the DAF to the charity. If the appreciation on your investment is significant, avoiding this capital gains tax is worth it!
With this strategy, I would encourage you not to overfund your DAF with more donations than you are able to grant out before reaching 70.5. Keep reading to find out why.
Traditional or Rollover IRA / over age 70.5
When you reach the age of 70.5, you are able to donate directly to charity from your IRA. This is called a Qualified Charitable Distribution (QCD) and we provide all the details here. This strategy is frequently more beneficial than continuing to use the DAF because it will reduce your required minimum distributions (RMDs) that start at 73 or 75, depending on your year of birth. However, depending on the size of your IRA balance, amount of appreciated securities in your taxable account, and your long-term goals, the years between 70.5 and 73 can vary on whether QCDs or DAF donations of appreciated securities are more impactful.
Before your RMDs begin, QCDs don’t change the actual amount of tax you pay that year. If you donate $5,000 to charity directly out of your IRA, the funds come out of your IRA tax free, but don’t reduce your tax bill in that year. However, they are still reducing your IRA balance. Your RMD is calculated each year based on the 12/31 balance the preceding year, so each donation makes your future RMDs lower.
After you start your RMDs, QCDs count toward fulfilling your RMD dollar for dollar (with some limits). If your RMD is $20,000 and you donate $5,000 of it to charity, you only pay tax on $15,000 of the RMD.
Professional help to maximize charitable giving tax benefits
We’re happy to help you figure out which charitable giving strategy is the best fit for your situation. This is fun math for us that makes a difference for you and the charitable organizations you support. Please visit us or contact us to schedule an appointment.