The world today seems increasingly divided. Anyone watching or reading the news is likely to be bombarded by stories about Russia’s invasion of Ukraine, our increasing tensions with China or the growing domestic political divide. But did you know, in midst of all these negative stories, that compassion and giving are on the rise?
The 2022 World Giving Index, the largest survey of charitable endeavors published by the Charities Aid Foundation, says that more people donated money to charity in 2021 than in any year of the previous decade. That occurred despite a global pandemic and other hardships. If you keep score, the United States came at No. 3 in the world at generous giving.
I see much generosity among my clients. They support charities, and many want to do even more. And you? Do you enjoy making donations to an alma mater, to a veteran’s association or to a religious organization? Here are some ideas on making your giving more intentional.
Ways to give
There are 3 basic ways to make charitable financial gifts.
- Traditional Giving. You manually make donations to a charity or charities.
- Qualify Charitable Donations. If you have an IRA and are taking your required minimum distributions, then you can direct me to send each year’s RMD, or a portion of the RMD, directly to a named charity or charities.
- Donor-Advised Funds. If you have a larger amount of money available to give ($5,000 or more), a DAF is like having your own private charitable foundation — but with lower minimums and far easier administrative arrangements than an actual foundation, and with generally excellent tax benefits.
To be clear, there is nothing broken with traditional giving. You have money to give and a charity or charities in mind. In my opinion, the problem with traditional giving is that it tends to be reactionary rather than planned. A more intentional approach to charitable giving could provide greater tax efficiency, offer more flexibility on the timing of donations or simply be less work to manage year in and year out. That’s where Options 2 or 3 can make more sense.
Option 2 — QCDs
Qualified Charitable Donations make more sense if you are already taking required minimum distributions (age 73 and up) or are about to begin taking RMDs. QCDs can save you taxes and get the job done in a deliberate way.
Suppose you have a $20,000 RMD and can afford to give some of it to charity. Instead of receiving the entire $20,000 — and manually sending money yourself and hoping your donation can be deducted from your taxable income — you instruct me to transfer funds from your IRA custodian directly to a qualified charity. That’s a QCD.
Let’s say that amount is $2,000. By sending $2,000 directly to the qualified charity, your taxable income from RMDs will be $18,000, not $20,000. The QCD lowers the income you’re taxed upon, so there is no concern about your donation being deductible.
Best of all, the entire $20,000 counts as your RMD, even though you will only be taxed on $18,000 as ordinary income.
Option 3 — Donor-Advised Funds
A donor-advised fund can do even more. DAFs are applicable to anyone with charitable inclinations, regardless of their age.
The litmus test is the amount you plan to donate each year. If you can only give a few hundred dollars, then a DAF doesn’t make sense. You can give that money the traditional way or via QCD. But if you can afford to grant $5,000 to $10,000 a year then let’s talk about DAFs.
DAFs allow you to do 3 important things.
- You give away money up front. You get a tax deduction for the entire amount in that calendar year — even though you may not grant the entire amount that year.
- You control the charitable grants. That’s a real benefit. DAFs give you leeway to determine how much to grant, when to make grants and who will receive them.
- You can grow your charitable donations. The DAF balances can be invested, so the money you’ve set aside for charitable giving can appreciate in value before you decide how much to give your charities.
Example: Suppose you place $5,000 in a donor-advised fund. You don’t have to grant the money to charity right away. You could wait until later in the year to do that. Even then, you could grant only a portion of that $5,000 — say 50% — and still get to deduct the entire $5,000 that calendar year.
You can also donate appreciated assets to a DAF without realizing any capital gains. This could be an extremely useful tool for folks with charitable inclinations that have low-cost-basis stock from an old inheritance or company stock awards. They could donate a portion of those stock positions to a DAF and realize the current market value as a charitable donation without creating a capital gain.
A DAF is like having your own foundation.
- You make grants to the charities you favor.
- You control the frequency of the grants.
- You control the grant amounts. (The minimums can be $50 to $250 a year per charity, depending on the DAF).
- You can invest the DAF balances.
In good years, your DAF can grow, and you retain control of the fund’s investment options. That’s important if you’re going to spread out the charitable grants over multiple years.
And suppose you have a windfall. You can put the windfall in a DAF and decide which charities and how much to grant to each later on. You could spread the grants over multiple years, buying yourself time to decide how much to grant and to whom. If your windfall was $50,000, and you contribute that amount to a DAF, you can generally deduct $50,000 that calendar year — even though you may not grant all the money that year.
I’ve had a lot of conversations about Qualified Charitable Donations and Donor-Advised Funds lately. Most folks say, “Wow! Getting more intentional about my giving seems worth it.”
Of course, there are limits on how much you can give. Under the SECURE 2.0 Act of 2022, Section 307, individuals who are 70½ years old or older may use a QCD to donate up to $100,000, indexed for inflation, to qualified charities directly from an IRA for tax years 2023 and onward.
DAFs and QCDs are relatively straightforward. And they can help make your charitable endeavors more thoughtful, more tax efficient and more rewarding.
Call me if you’d like to learn more.