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While tax breaks are not the main reason for charitable giving, some strategies can help investors optimize their donations.
It’s too late to execute some strategies with the end of 2023 just days away.
“We encourage people to start thinking about charitable giving in June,” said Julie Goodridge, founder and CEO at NorthStar Asset Management, which ranked No. 44 on the 2023 CNBC FA 100.
But now is a smart time to start planning for 2024.
“You might benefit from taking care of these things sooner rather than later. It gives you more time to think about what you’re doing, be more thoughtful and make sure you’re not missing opportunities,” said certified financial planner Stephen Cohn, co-president and co-founder of Sage Financial Group, ranked No. 22 on the FA 100 list.
Your early planning can also benefit the nonprofits you want to aid.
“It really helps a lot of organizations spread out and get [donations] earlier in the year anyway,” said CFP Shaun Williams, partner and private wealth advisor of Paragon Capital Management. The firm ranked No. 57 on CNBC’s FA 100.
Here are three strategies to optimize your charitable contributions from some of this year’s top advisors:
1. Open a donor-advised fund
One of the most common strategies for increasing deductions for charitable donations is to open a donor-advised fund, said Cohn.
These accounts let a taxpayer donate a lump sum upfront to claim the deduction in that tax year, and then dole out the money to nonprofits over time. A significant contribution can enable the taxpayer to itemize deductions, rather than take the standard deduction, and receive a tax benefit for their charitable giving, he said.
Consider opening a donor-advised fund within your last working years and contribute enough money to donate throughout your early retirement.
“A tax deduction is more powerful the higher the bracket you’re in,” said Williams.
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2. Donate appreciated stock
Investors can do “significant charitable giving by looking at your portfolio and giving away appreciated stock,” Goodridge said.
Donating appreciated stock gives investors the opportunity to shelter the gains from taxes, Cohn said. If you have held the stock for at least a year, you can generally take its fair market value as a deduction.
“That’s a significant opportunity and benefits people that are looking to donate funds to a charity,” he said.
Donating appreciated stocks also complements use of a donor-advised fund.
“Give those shares either to a donor-advised account or directly to a nonprofit organization,” Goodridge said.
3.Make qualified charitable distributions
A “qualified charitable distribution,” or QCD, is a direct distribution from a pretax individual retirement account or a 401(k) to a charity, Cohn said.
Retirees who must take required minimum distributions, or RMDs, from such retirement accounts can benefit from fulfilling a portion with a QCD. Doing so helps satisfy the RMD, and the transfer isn’t counted toward their adjusted gross income.
Make sure to take advantage of these breaks in 2024. Most laws around charitable giving may change as provisions in the Tax Cuts and Jobs Act “sunset” by the end of 2025, Williams said.
“Next year’s election is a pretty pivotal year. Whatever happens with these elections would have very long-term effects on taxes overall and charitable giving,” he added.
