Did you know charitable giving is an excellent way to support causes you care about while receiving substantial tax benefits? It’s true! How you give can significantly impact the amount of tax savings you generate and the overall effectiveness of your charitable giving strategy.
At BCR Wealth Strategies, our team of Birmingham CFP® professionals helps individuals and families integrate charitable giving strategies into their broader financial, estate, and tax planning, ensuring you maximize both the impact of your donations and your tax savings.
In this article, we’ll examine various tax-efficient methods for charitable giving, such as donor-advised funds, charitable remainder trusts, and the donation of appreciated stock. These strategies can help you preserve more of your wealth for heirs while making meaningful contributions to the causes that matter most to you.
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Donor-Advised Funds: Flexibility and Immediate Tax Benefits
One of the most popular methods of charitable giving is through a donor-advised fund (DAF). A DAF allows you to contribute cash, appreciated assets, or other investments into a charitable account where the funds can grow tax-free until you are ready to make grants to your favorite charities.
How a Donor-Advised Fund Works
- You contribute assets to a donor-advised fund, often held by a charitable organization that you select or the custodian where you invest.
- You receive an immediate tax deduction for the year you contribute to the fund, even if you choose to make future contributions to the charities of your choice.
- The assets inside the DAF can be invested to grow tax-free, enabling you to increase your future donations.
- You decide which charities to support, making you more strategic with your future donations.
- From a tax-efficient perspective, contributing appreciated assets like stocks to a DAF can be particularly beneficial. Donating these assets in kind enables you to avoid capital gains taxes when sold, which can be a substantial boost, particularly for those seeking tax benefits.
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Charitable Remainder Trusts: Giving, Tax Deductions, and Income
A charitable remainder trust (CRT) is a more complex entity but a highly effective way to balance your desire to make future gifts to charities with the production of income during both spouses’ lifetimes.
A CRT is an irrevocable trust that provides income to you (or another beneficiary) for a set number of years or life that is determined by you when you establish the trust. At the end of the trust’s designated term, the remaining assets are transferred to your chosen beneficiary (charitable organization).
This strategy is particularly attractive for individuals who want to minimize taxes and generate current income while making a significant future gift using a charitable giving strategy. BCR Wealth Strategies can guide you through setting up a CRT, ensuring it fits seamlessly into your long-term financial and charitable plans.
How a Charitable Remainder Trust Works
- You contribute appreciated securities, cash, or other assets to fund the trust
- You (or a designated beneficiary) receive income from the trust for life or a specific period
- After the trust’s term expires or the surviving spouse passes, the remaining assets are donated to the charity named in the trust
- Contributions to a CRT can provide an immediate charitable deduction, allow you to avoid capital gains taxes on the sale of appreciated assets, reduce estate taxes, and generate income
Donating Appreciated Stock: Maximizing Tax Efficiency
One of the simplest yet most tax-efficient charitable giving strategies is donating appreciated stock directly to a charity. By gifting stock that has increased in value, you can avoid paying capital gains tax when the stock is sold and claim the full market value of the stock as a current charitable tax deduction.
This method is particularly effective if you hold highly appreciated stock but want to avoid the tax impact when you sell it. A Birmingham financial advisor can assist you in identifying the appropriate stocks to donate and when.
The charity receives the full benefit of the donation, and you gain the tax advantages—making it an excellent tool for preserving your wealth while giving back to organizations you believe in.
Why Donating Appreciated Stock is Beneficial
- Donating stock directly to a charity avoids paying the capital gains taxes you would otherwise incur if you sold the stock yourself from a taxable account
- You can deduct the full fair market value of the stock on the date of donation, maximizing your tax deductions
- Since charities don’t pay taxes on donated assets, they can sell the stock tax-free and use the full value of the proceeds to fund its operations or a building, making it a win-win scenario
Qualified Charitable Distributions: Giving from Your IRA
Another tax-smart strategy, particularly for retirees, is using Qualified Charitable Distributions (QCDs). A QCD allows you to transfer funds directly from your IRA to a qualified charity, which satisfies your Required Minimum Distribution (RMD) for the year without adding to your taxable income.
Some of the financial benefits associated with QCDs include:
- Starting at age 70 ½ you can take a distribution from your IRA as a QCD and once you reach RMD age, a QCD can satisfy your RMD.
- The distribution is made directly from your IRA to the charity, so it isn’t included in your taxable income
- Since QCDs lower your taxable income, they can help you avoid moving into a higher tax bracket, thereby reducing your risk of increased taxes on Social Security benefits or higher Medicare premiums
- By utilizing QCDs, you can pursue your charitable goals while also reducing your taxable income—a key aspect of charitable planning in Birmingham.
BCR Wealth Strategies: Helping You Preserve Your Wealth
At BCR Wealth Strategies, our team of financial advisors in Birmingham can help you explore the various charitable giving strategies that would be best for your financial situation.
Your charitable planning alternatives should fully integrate into your comprehensive financial and estate planning strategies. This maximizes the impact of your donations, helps you manage your taxes, and ensures more of your wealth is preserved for future generations.
With the guidance of our Birmingham CFP® professionals at BCR Wealth Strategies, you can be confident that your charitable giving will support your current financial goals and the causes you care about now and in the future.
Are you ready to learn more about how charitable giving strategies can benefit you and your family? Contact us today.
