Can you make charitable giving less ‘taxing’?

Long version

Once again, it’s the season of generosity. In addition to considering gifts for your loved ones, you might want to think about charitable gifts as well. But what should you know before making gifts to charities? And what impact might these gifts have on your financial and tax situation?

First, you may want to create a gift budget by deciding just how much you will give to charitable organizations over the rest of the year.

Next, look closely at the groups to whom you wish to contribute. You can find many reputable charities, but some others may be less worthy of your support. One of the red flags of a questionable organization is the amount of money it spends on administrative costs versus the amount that goes to its stated purpose. You can check on the spending patterns of charitable groups, and find other valuable information about them, on the well-regarded Charity Navigator website (charitynavigator.org).  

Once you’ve established a gift budget and are comfortable with the groups you choose to support, you might turn your thoughts to another key issue connected with charitable giving: tax benefits. A few years ago, changes in the tax laws resulted in a large increase in the standard deduction, which meant that many taxpayers found it more favorable not to itemize — and lost the ability to take charitable deductions. But if you still do itemize, your charitable gifts or contributions to tax-exempt groups — those that qualify as 501(c)(3) organizations — can generally be deducted, up to 60% of your adjusted gross income, although lower limits may apply, depending on the nature of your gift and the organization to which you’re contributing.

Other, more long-term avenues also exist that combine charitable giving with potential tax benefits. One such possibility is a donor-advised fund, which allows you to make an irrevocable charitable contribution and receive an immediate tax deduction. You can give cash, but if you donate appreciated assets, such as stocks, your tax deduction would be the fair market value of the assets, up to 30% of your adjusted gross income. Plus, you would not incur the capital gains tax that would otherwise be due upon the sale of these assets. Once you establish a donor-advised fund, you have the flexibility to make charitable gifts over time, and you can contribute to the fund as often as you like.

Another possible tax benefit from making charitable contributions could arrive when you start taking required minimum distributions, or RMDs, from some of your retirement accounts, such as your traditional IRA and 401(k). These RMDs could be sizable — and distributions are counted as taxable income. But by taking what’s called a qualified charitable distribution (QCD), you can move money from a traditional or Roth IRA to a qualified charitable organization, possibly satisfying your RMD, which then may be excluded from your taxable income. You must start taking RMDs at 73 but you can begin making QCDs of up to $100,000 per year as early as age 70½. (This amount will be indexed for inflation after 2023.)

Establishing a donor-advised fund and making qualified charitable distributions are significant moves, so you’ll need to consult with your tax advisor first. But if they’re appropriate for your situation, they may help you expand your ability to support the charitable groups whose work you admire.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
Edward Jones, Member SIPC

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Short version (radio or print)

PSA: Can you make charitable giving less ‘taxing’?

TBA: Nov. 27, 2023

Once again, it’s the season of generosity. If you’re thinking of making charitable gifts, what should you know?

For starters, make sure that any charity you’re planning to support is reputable and uses its funds wisely. You can find valuable information on charities at the Charity Navigator website.

You might also think about the tax benefits of charitable giving. If you itemize on your taxes, you can get a deduction for gifts of cash or other financial assets.

But you might also think about longer-term charitable giving strategies that offer tax advantages. One such possibility is a donor-advised fund, which allows you to make charitable contributions and receive an immediate tax deduction. And if you give appreciated assets, such as stocks, you might also avoid capital gains taxes.

Once you turn 73 and must start taking withdrawals from some of your retirement accounts, you could consider having some of this money go directly to charities through a qualified charitable distribution, which can be excluded from your taxable income.

See your tax advisor to determine if these strategies are appropriate for you. If so, they might help make your charitable giving a less taxing event.

​​Edward Jones, its employees and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding our situation.

Member SIPC

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