Charitable giving can be a winning strategy for managing your tax liability. As we approach the end of the year, there are several ways to give to a charity or loved one with the added benefit of reducing your tax burden and taxable estate.
Over age 73?
Qualified Charitable Distributions are a great option for charitable gifting if you’re over age 73 and required to take a minimum distribution (RMD) from your IRA. You can donate funds directly from your Traditional IRA to a 501(c)(3) organization, reducing the taxable income from the RMD by the amount you give. Anyone over age 70½ is eligible to make a qualified charitable distribution from a Traditional IRA, up to $105,000 per year. This can also be a good option to reduce your taxable income if you’ve had a significant increase in earnings.
Bunching donations
If you’ve had a high-income year, you can “bunch” several years of planned giving. This has the combined benefits of lowering current taxable income, having greater deductible impact on your overall tax liability than donating the sum over several years and giving a big boost to the organizations you support.
Donor-advised fund
If you’re legacy minded but still want to be judicious about your tax liability, a donor-advised fund may be a good option as the fund creates an immediate tax deduction for the cash or assets used to create it. If the expenditure exceeds 60% of your adjusted gross income or 30% of income from an appreciated asset, then you can carry forward that deduction for up to five years. It’s an excellent way to build a fund that can grow tax-free in perpetuity to support a cause you’re passionate about.
Trusts
Establishing a trust is another way to contribute to a cause or provide security for loved ones while avoiding a steep 40% tax on your estate. The estate tax exemption – which can include investments, real estate or businesses – may be cut in half from $13.6 million to $6.8 million when the Tax Cuts and Jobs Act (TCJA) provision sunsets in 2025.
A charitable remainder trust (CRT) can put you as both the donor and the beneficiary. The donor will get an immediate tax deduction, and the beneficiary can receive an income stream for up to 20 years while avoiding capital gains and estate taxes on the funds or assets. This is just one example of the many advantageous trusts available in Tennessee.
Individual Gifting
Individuals can gift anyone up to $18,000 without creating a tax impact for themselves, their estate or the recipient. One popular trend is grandparents gifting 529 savings plans to build funds for college or accredited K-12 education. These funds grow tax-free, and they get distributed tax-free for the benefit of the child or grandchild. Gifting funds to 529 plans won’t lower your taxable income, but they are great strategies for giving.
We are happy to meet with you to explore these and other giving strategies that minimize tax impact.