The IRS generally allows taxpayers to deduct charitable contributions up to 50 percent of adjusted gross income. For certain private foundations, veterans organizations, fraternal societies, and cemetery organizations, the IRS limits deductions to 30 percent of adjusted gross income. Because these rules can get complicated, keep thorough records and discuss your tax situation with a qualified professional.
Think out of the box
According to the IRS, qualified individuals can donate up to $108,000 directly to one or more charitable organizations from their taxable IRA account. The amount increases to $216,000 for married couples. The IRA custodian transfers the funds directly to the qualified charity by electronic deposit or check.
Many times, an RMD will push the taxpayer into a higher tax bracket. Rolling over an RMD into a QCD has a tax advantage for the donor. QCDs reduce the balance of the IRA, which may reduce the amount of the RMD for future years. Tax law excludes QCDs from the maximum charitable deduction limits for taxpayers who itemize.
If you do itemize your charitable giving, the $108,000 can be above the limits. Donating in this way gives you more of a reason to use your RMD instead of using cash or some other assets. Tax law generally allows donors to deduct charitable contributions equal to 20% to 60% of their adjusted gross income. QCDs let donors make larger donations because AGI limits do not apply.
What about trusts?
A charitable trust is one way to fulfill your philanthropic goals; it comes with benefits like income tax deductions for the fair market value of the donated assets, a potential reduction in real estate taxes, and the avoidance of capital gains taxes on appreciated assets. Charitable trusts are one way to create a family legacy of giving as part of savvy tax planning within your estate plan.
There are two kinds of charitable trusts:
- Charitable remainder trusts — In these, the donor or other designated individual(s) receive income from the trust either for their lifetime(s) or for a period of up to 20 years, after which the remaining assets go to the designated charity.
- Charitable lead trusts — These offer the income to the charity for a set period, and the remaining assets then pass to your beneficiaries.
Attorneys classify both of these as split-interest trusts because they divide payments between the donor and a noncharitable beneficiary. Speak with a professional about how to set these up.
Consider long-term planning
A bequest in your will or revocable trust allows you to leave a specific amount, percentage, or asset to a charity. This approach is simple and flexible and qualifies for an estate tax deduction. Naming a charity as a beneficiary of your retirement accounts — such as your traditional IRA or 401(k) — can also be tax-efficient, as charities do not pay income tax on distributions.
Another option is donating appreciated stock directly to a charity. If you sell the stock yourself, you may owe capital gains tax. However, if you donate the stock to a nonprofit, you will be able to claim a tax deduction for its full market value while avoiding capital gains tax. The charity can then use its tax-exempt status to sell the stock without incurring capital gains tax.
If you would like to provide income for your heirs before benefiting a charity, a charitable remainder trust allows selected beneficiaries to receive payments for a specified period, after which the remaining assets transfer to the charity. This can be an effective way to balance financial support for loved ones with charitable intentions.
No matter what you do, a year-end plan is great to help you address your charitable goals. Consult your estate planning attorney to see what strategies are set up in your plan. If you would like to work with our office on your estate plan, call or email our Petaluma, CA office to join an upcoming webinar or seminar.
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