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Many investors care deeply about giving back to their communities, and they often do so through traditional monetary gifts. While cash can be an easy and convenient vehicle to support your favorite nonprofits, there are other gifting strategies that may help maximize the value of your generosity and provide tax advantages. Here’s an overview on four strategies that may be worth exploring.
If you hold stocks or other investments for more than one year that have gained value, you may consider liquidating the asset to make a charitable donation with the proceeds. However, doing so may result in a taxable long-term capital gain. One potentially more efficient way to maximize the value of your donation is to give appreciated stock directly to a qualified charity. The charity would receive an asset it can continue to hold or immediately sell, and you would not generate taxable income from a sale of the asset prior to the donation. Additionally, the market value of the stock at the time the gift is made is generally deductible from your adjusted gross income if you itemize your deductions (subject to income-based limitations). Check to ensure the charity accepts this type of donation before exploring it as a financial strategy.
Another way to consider gifting assets is to set up a charitable trust. Trusts can help you manage highly appreciated assets in a more tax-efficient manner while, in some cases, allowing you to split assets among charitable and non-charitable beneficiaries. The timing of each gift and the flexibility you want dictates the type of trust that works best. With a Charitable Lead Trust, a charity is funded with income from assets placed in the trust for a specified time period. After that time, the remaining assets revert to other named beneficiaries, such as your heirs. In a Charitable Remainder Trust, the reverse occurs. The trust makes regular income payments back to you or another beneficiary. After a period of time specified in the trust, the remaining assets are directed to the named charities. These trusts have specific rules and are generally established through a professional. An alternative option is to choose a donor-advised fund, which allows you to make a large donation that may be immediately deductible from taxes but gives you the flexibility to recommend gifts to charities spread out over a period of years. Work with your attorney or tax professional for additional information on what may be appropriate for your circumstances.
Workplace giving campaigns are becoming increasingly popular. Your employer may offer the convenience of making contributions through payroll deductions, allowing you to give systematically with each paycheck. In addition, your employer may match a certain donation amount, which can add to the impact your gift makes. If you have access to these or other workplace giving programs, check to see if the charities you care about are eligible to receive this type of donation.
If you have reached age 70 1⁄2 or wish to wait until the age at which you are required to take distributions from your traditional IRA each year, but you don’t need the money to meet your essential and lifestyle expenses, you may prefer to avoid the resulting tax bill. An alternative is to take advantage of the Qualified Charitable Distribution rule. It allows you to transfer funds directly from your IRA to a qualified charitable organization. This is a tax-efficient way to shift up to $100,000 in 2023 or up to $105,000 in 2024, out of an IRA. By doing so, you may avoid having to claim income (and subsequent tax liability) since you would not receive the required distribution. If you have not yet reached the age at which you are required to take distributions, you may want to consider this strategy as part of your retirement plan. To determine when required distributions will start for you (based on your birth year), visit IRS.gov.
As you consider these charitable giving along with other gifting strategies, consult with your financial advisor and tax advisor. These professionals can help you evaluate the choices to ensure the gifts you make are most effective for your goals and consistent with your overall financial plan.
Douglas A. Crumley Jr., CFP, CKA, CRPC, APMA, is a Private Wealth Advisor, Business Financial Advisor with Crumley & Associates a private wealth advisory practice of Ameriprise Financial Services, LLC. in Fair Oaks, CA. He specializes in fee-based financial planning and asset management strategies and has been in practice for 19 years. To contact him please visit www.dougcrumleyjr.com, or call (916) 638-4600. Office address 7956 California Avenue, Fair Oaks CA 95628.
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