25 May 2021
Giving Strategies to Maximize Your Charitable Contributions
Giving to charity is an easy way to make an impact, both for the donor and the recipient. Yet, it can be very overwhelming to understand all of the ways to give to charity and which method is the most advantageous. There are many gifting strategies beyond the popular cash contribution that may be more tax-favorable for the donor. Anyone donating to charity should consider the following strategies that may help maximize the benefits of charitable contributions:
1. Gifts of Appreciated Securities
Instead of gifting cash to charity, consider gifting stocks or other securities that have appreciated in value since the date of purchase. There are two main tax advantages to gifting appreciated securities.
- First, if you gift appreciated securities that you have held for more than one year to a charity, you can claim an itemized charitable deduction equal to the fair market value of the securities at the time of the gift, up to 30% of your adjusted gross income.
- Second, you would avoid recognizing any capital gains if you gift appreciated securities to a charity instead of first selling the securities and donating the proceeds to charity. It should be noted that for tax years 2020 and 2021, a donor may deduct cash contributions made to public charities up to 100% of their AGI. Therefore, a donor may wish to donate appreciated securities up to the 30% limitation and then donate cash for any additional donations. Each donor’s circumstances must be analyzed to determine the most advantageous method of gifting.
2. Qualified Charitable Distributions from IRAs
If you must take required minimum distributions from an IRA, you should consider making distributions directly from your IRA to a charity, referred to as a “qualified charitable distribution” or “QCD”. There are several tax advantages to using this strategy for charitable giving.
- First, the QCD is counted towards your required minimum distribution for the year, up to a maximum of $100,000.
- Second, the QCD reduces income taxes owed because the QCD is never included in your taxable income. The tax benefit is available even if you take the standard deduction instead of itemizing your deductions. Further, keeping your taxable income lower may increase eligibility for certain tax credits and deductions. There are requirements for QCD so be sure to consult your advisors when making such a contribution from your IRA.
3. Giving Upon Death
There is an estate tax deduction for assets that pass to charity upon your death. Charitable contributions upon death will likely become a more attractive strategy if the estate tax exemption decreases and the estate tax rates increase. Currently, there is no Wisconsin estate tax and the federal estate tax exemption is $11.7 million per person. Assets in excess of the federal exemption amount for which there is no deduction are taxed at a flat rate of 40%. The estate tax exemption is scheduled to decrease in 2026 to the pre-2018 exemption amount of $5 million per person, adjusted for inflation, however, there are proposals in Congress to decrease the exemption even further to $3.5 million per person. There are also proposals to increase the estate tax rates or create a progressive estate tax rate system. Should any of these proposals be enacted, gifting to a charity is a way for philanthropic individuals to support charitable work and to reduce estate taxes.
If you are considering making charitable contributions either during your lifetime or upon your death, you should consult your attorneys and tax advisors to discuss which strategies best accomplish your charitable giving goals and maximize your contributions.
About the Author
Melissa Kampmann, Attorney with Ruder Ware Law Firm in Wausau, WI, counsels individuals and families to create a plan for the transfer and preservation of their assets during their lifetime and at death. She also assists family members and friends of her clients in working through probate and trust administration. Serving as trustee of family trusts, she carries out client intentions through the firm’s Fiduciary Services department. She also works closely with business owners to create a plan of business succession.