Charitable giving is a staple for many families. Giving back is a way of expressing our gratitude for our own circumstances and giving others a chance at that same happiness. The practice of donating is an integral part of our economy, with millions of dollars being donated to charities each year.Under the new Tax Cuts and Jobs Act, the way people donate to charity will have to change. With the standard deduction nearly doubling for all taxpayers, donating in cash won’t be the most lucrative option. For those in retirement, there are a couple really great options to both make a difference and give you a break on your taxes.
1. Donate Non-Cash Assets
When you donate assets to charity you are able to get the tax benefits of that asset and the charity will be eligible to receive the full amount of the asset without having to relinquish most of the profit to the government. Assets could include:
So how does it work?When assets appreciate and you sell them for a profit, you are required to pay capital gains tax on the earnings. By donating those assets to charity instead, you won’t have to worry about capital gains tax and you’ll take a tax deduction on the fair market value of the asset. With the average long term capital gains tax resting at about 20%, your charitable contribution is able to increase dramatically by donating the stock, bond, or mutual fund as opposed to selling the stock then donating the remaining amount.
Donor-advised funds function in a similar way, but they often have different tax benefits depending on the type of fund you have set up. These funds work to provide the account holder with a more immediate tax deduction. Those deductions are often invested back into the fund and then donated to any public charity of your liking. If a donor-advised fund is something you would like to consider, we can help you set that up.
2. Donate RMDs
Required minimum distributions are federally-mandated withdrawals that must be taken annually from eligible retirement accounts once the account owner reaches age 70 ½. The amount of your RMDs will change each year based on the overall worth of the account and your life expectancy. Retirement accounts that are subject to RMDs are:
401(k), 403(b), 407(b)
It is important to note that while a Roth 401(k) is subject to RMDs, a Roth IRA is not.
It is important to keep an eye on your RMDs and ensure that you take the correct amount from your accounts each year. If you don’t the IRS will slap a 50% penalty on the money that you were supposed to take out, and to add insult to injury withdrawals from most retirement accounts will also be taxed as income.
RMDs often play a crucial role in a retiree's income, but if you are among the few who do not need these withdrawals, you should consider donating the amount to charity. This strategy is known as the qualified charitable contribution (QCD). It is important to note that even though there are many accounts that require an RMD, you can only donate through a QCD with an IRA.
The withdrawals you take from most retirement accounts will be taxed as income. This could lead to raising your income bracket and therefore increasing your tax threshold. By doing a QCD, you avoid the jump to a higher tax bracket saving you a lot of money.
Let’s say that your RMD for the year is $14,000. If you make $14,000 or more in QDCs, you fulfill both your RMD and your charitable giving for the year.
It is important to note that a QCD must be done through the account itself in order for the donation to be eligible. That means if you withdraw money from your traditional IRA and afterward donate the proceeds to charity, the withdrawal will be taxed as income and the QCD is not an option. Here are some key points to remember:
QCD is valid only if the contribution is made from an IRA custodian or a trustee to the charity
Taking a distribution from an IRA and making a contribution after is not a QCD
There is a $100,000 annual limit per taxpayer
QCD can only be made from an IRA. All employee contribution plans are not eligible for QCD.
A QCD must be funded with pre-tax dollars
The account holder cannot claim a deduction on QCDs.
QCDs are limited to private charities
With these creative options, writing a check just won’t cover it for your charitable contributions this year. Give us a call and we can talk about the best way for you to increase the impact of your charitable gift this year.