Charitable giving can become an important aspect of the lives of many retirees. After working hard and saving diligently throughout your career, perhaps you want to give back to your community and the causes you care about. There are many potential benefits to giving in retirement, such as supporting meaningful charities, income tax benefits, and potential estate tax benefits. Alongside the benefits, there are important considerations in choosing how to give, what to give, and who to give to. Here, we’ll explore the basics of charitable giving with a particular emphasis on retirees.
Why give in the first place?
If you are a charitably inclined individual, the benefits of giving can go beyond the benefit that you give to the charities you give to – there are tax and estate benefits for you as a donator! Charitable gifts can reduce your tax burden through tax deductions, or potentially avoid them altogether by directly gifting assets with large gains. Further, if you have a potentially large estate there are a variety of mechanisms to remove money from your estate while ensuring that you have a say in how your charitable gift is used.
Beyond the scope of the financial benefits it can bring to one’s financial world, charitable giving has a host of intangible benefits as well. Many retirees get a great deal of satisfaction from giving, particularly if they give both time and money. You can help see your community grow by donating to local causes, such as food banks or local schools. Many people like to give to their Alma Maters too! Whatever charity or cause you decide to give to, you can leave a legacy of improving the world around you even with small donations!
How do I donate intelligently?
Giving to a charity is a simple act: give cash, assets, items, or your time. What is more complicated is giving in such a way to maximize the benefits you receive from your charitable giving. There are a wide variety of factors to consider when deciding what and how to donate. Let’s start by evaluating some of the important considerations when it comes to how to donate.
Your Income Taxes
Your personal income tax situation is the first item to evaluate when you are determining how to intelligently donate to charities. The biggest question is whether or not you will take the standard deduction or itemize your deductions. If you take the standard deduction, you will not be able to deduct donations that you have made. However, if you have high state and local taxes (SALT), mortgage interest, unreimbursed medical expenses, and are planning to make significant charitable contributions in total excess of $29,200 if you are married filing jointly or $14,600 if you are a single filer then making large charitable contributions could be a great fit for you!
What do you plan to donate?
Not all donations are created equal. Some of them can convey a larger benefit than others, and some can even be quite a headache. One of the best items to donate is a highly appreciated asset. An example of this could be a stock that you bought many years ago and has large gains that if you were to sell the stock would mean a large tax burden. You can flip this on its head by donating the asset directly to a charity. Instead of paying a large tax bill, you instead get to write off the value of the stock at its current value! Just be aware that this technique is subject to the 50% and 30% limitation which we will cover in more detail below.
Next on the list of great items to donate is the king: cash. Donating cash is simple, easy, and convenient. There is no question about the value of what you donated, no need for an appraisal, and a receipt is easy to get from the charity you donate to. Cash also has the advantage of being subject to the 60% limitation instead of the 50%/30% limitation like appreciated assets.
One more thing that you can donate is physical property. If you collect fine art or jewelry, you’re downsizing and getting rid of a lot of furniture, or perhaps you inherited a lot of physical property you have no use for, you can consider donating! A few important notes: first, any donations with a value of $250 or more need to be supported by a receipt. If the item has a Fair Market Value of greater than $5,000, then it needs to be supported by a Qualified Appraisal. This can be a headache, making stocks, bonds, and cash more attractive as donation options.
The different types of charities and the impact on deductions
There are two types of charities for the purposes of donations: 50% and 30% organizations. Most charities are 50% organizations. Common examples are churches, The American Red Cross, and the Sierra Club. Donations to a 50% organization means that you can deduct up to 50% of your Adjusted Gross Income (AGI). For 30% organizations, you guessed it, you can deduct up to 30% of your AGI. Common 30% organizations are Veterans Organizations and Fraternities (but not universities). As we mentioned with cash donations, they ignore this distinction and allow you to deduct up to 60% of your AGI regardless of the organization type.
To be frank: this is a highly simplified version of tax law surrounding donations to charities. If you have questions, consider speaking to a Financial Advisor like the professionals at Farnam Financial.
Qualified Charitable Distributions (QCDs)
QCDs are unique in the world of charitable contributions. Many of the rules from before do not apply, so in determining if you can take advantage of QCDs let’s start from scratch and ask a few simple questions. If you answer “Yes” to all the following questions, then you may be able to take advantage of the special QCD rules! First, will you reach the age of 73 this year? Second, do you have a Traditional IRA, 401(k), or 403(b) account with a reasonable amount of retirement savings? Put another way, are you taking Required Minimum Distributions (RMDs) currently? If so, you can use some of your RMDs as QCDs. This sounds complicated, but it is quite simple in practice. Let’s break it down.
For starters, why would you use the QCD rule instead of just taking your normal RMDs and donating those to charity? The reason is quite plain: any RMD taken as a QCD is not included in your income. This can provide huge tax advantages, especially if this means staying in a lower tax bracket.
How does one do a QCD? Each custodian (the institution where your investments are held) has a different setup, so contact a representative of your custodian and inform them that you would like to do a QCD. We should note that your entire RMD amount does not have to be taken as a QCD for this rule to work, you can use a partial amount if you would like. For example, if I had a $10,000 RMD for 2024, I could do a $100 QCD up to a $10,000 QCD. Further, you can do multiple QCDs for multiple different charities.
Advanced Techniques for Charitable Transfers
We have only begun to scratch the surface of the complexities of charitable giving. The following techniques are generally intended for individuals whose estates will exceed the lifetime estate tax exemption, which in 2024 is a whopping $13.61 million dollars. What this means is most everyday folks will not need to consider more advanced techniques. If you believe you will have an exceptionally large estate and are charitably inclined, we recommend talking to both an estate attorney and a financial advisor. Let’s introduce a few of the advanced techniques used by those with large estates just so you have an idea of what your financial advisor and estate attorney may recommend.
Charitable Remainder Trusts: these are used when the donor wants to continue to receive a stream of income from the trust for less than 20 years. What remains in the trust (hence ‘remainder’ in the name) at death is then given to charities specified by the donor. There are two versions of this trust: a Charitable Remainder Annuity Trust (CRAT) and a Charitable Remainder Unitrust (CRUT). A CRAT is funded by a single donation of which the donor receives a present income tax deduction on the amount donated and receives a specific amount from the trust each year. A CRUT is similar, but it allows for multiple transfers into the trust and a specific percentage from the trust each year.
Charitable Lead Trusts: These trusts are Charitable Remainder Trusts in reverse, the income from the trust is given to a charity, and at death, the remainder of the value of the trust is given to non-charity beneficiaries. With a charitable lead trust, you receive an upfront tax deduction. However, the person who established the trust (the grantor) must pay taxes on income generated from the trust. The main benefit is that upon the transfer of the assets in the trust at death to the non-charity beneficiary, that beneficiary receives a charitable deduction on all the income that the trust has paid. For example, if a Charitable Lead Trust paid a charity $15 million over the lifetime of the trust, and the total amount distributed to a non-charity beneficiary at death is $20 million, the total taxable amount is only $5 million as the $15 million that was donated is deducted from the $20 million distributed.
Pooled Income Fund: This is an arrangement in which the donor transfers property into a common commingled trust fund controlled by a single charity. The charity controls the investments of the fund, the donation is irrevocable, and the charity receives both income from the amount donated and the remainder of the assets at the death of the donor. The donor receives both a present value tax deduction on the amount donated to the charity, as well as a gift tax deduction on the present value of the remainder interest going to the charity.
Donor Advised Funds (DAFs): This is a specific account established at a single public charity. A DAF conveys the same benefits of a Pooled Income Fund but with the added benefit that the individual who donated the money can recommend specific investments and grants to the charity of their choosing, although the charity ultimately chooses how to use the funds. Donor Advised Funds have become particularly popular in the last few years as they are easy to set up and give the donor a sense of involvement and connection with their donation.
Private Foundations: These are the big guns. A private foundation is an entity founded and maintained usually by a single family solely to support a group of charitable causes chosen by the foundation.
Choosing a Charity
Okay, so we have decided whether charitable giving makes sense and how to give effectively. Let’s say you would like to give but you’re not sure where to give to. How can you decide what charities to support?
We have a few tips on making your dollars go the furthest. First, consider whether you would like to support a local or a global cause. Supporting local causes can make your life easy as you can go directly to the charity and see how they are using their funds. For example, if you would like to donate to a local animal shelter then you can spend some time at that shelter to decide whether you would like to give to it. If you want to donate globally, that can be a more difficult task. There are a lot of great organizations that have done a lot of the heavy lifting for us. Some of these organizations are givewell.org, charitynavigator.org, and givingwhatwecan.org.
Working with an Advisor
If this is all a bit confusing and overwhelming to you then you should know you are not alone. Charitable giving as a retiree is a complex task that requires care, forethought, and a robust understanding of the rules surrounding taxes, choosing charities effectively, and understanding the unique situation of each individual to decide the what, how, and why of charitable giving.
Thankfully, the professionals at Farnam Financial are experts in the field of charitable giving for retirees and are here to help you make sense of the unique world of charitable giving. Schedule a free 30-minute consultation today. Happy giving!
