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Tax Strategies to Help Charities

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We hosted an event on June 18th with a dozen charitable organizations to introduce some important information that will help you reduce the amount you pay in income tax. The information was also meant to assist your favorite charities in accomplishing their important missions by providing consistency to their budgeting process. I hope to summarize the key points for you here. 

Since the tax changes in 2018, most Americans are using the standard deduction rather than itemizing, as the standard deduction has nearly doubled—and SaLT tax deductibility is limited to $10,000. That means charitable contributions—which are itemized deductions—no longer have the same tax benefit for most. There are two ways you can plan to maximize the impact of your generosity:

Bunch your charitable giving. If you typically give $3,000/year to charity, the equivalent would be to give $15,000 every five years. In the year that you give the large donation, you could potentially jump above the standard deduction amount, creating less taxable income in one out of every five years. The problem with this strategy is the impact those lumpy contributions have on a charity’s annual budgeting process. A Donor-Advised-Fund (DAF) can solve that problem. 

DONATE: Give your bunched donation to your own “personal foundation”

GROW: We invest those funds at TD Ameritrade to build your giving campaign

GIVE: Choose how much, how often and to whom to grant donations from your DAF

By investing your DAF intelligently over those five years, we can help grow your initial donation to make an even larger impact for your chosen charities. 

There are three organizations involved in helping you set up and manage a DAF: American Endowment Foundation, Sommers Financial Management, and TD Ameritrade. AEF offers administration for 0.60% per year, while we offer our model portfolios inside your DAF for only 0.36% per year. Using commission-free ETFs at TD Ameritrade, your total cost is approximately 1% annually.

“Qualified Charitable Distributions” (QCDs) from your IRA/401k Rollover. If you are age 731, you must take Required Minimum Distributions (RMDs). By diverting your distribution directly to your chosen charities, the amount donated is not included in your taxable income. It also will lower your “Adjusted Gross Income” (AGI), potentially lowering the taxability of your social security benefits, and/or your Medicare Part B premiums. You can donate/divert any amount under $100,000 per year. The IRS, by requiring distributions beginning at age 73, was hoping to finally tax those saved wages; but you can side-step their attack with a QCD. 

We are excited to help our clients save money, while contributing to organizations that are doing good things in the world. Reach out when you’re ready to establish your “personal foundation.”

1. On January 1st, 2023 the SECURE ACT 2.0 moved the age at which you are required to begin distributions from your IRA from the year in which you reach age 73 for those born prior to 1960, and to age 75 for those born after 1959.