Cypress Wealth Services
December 2022
When you have been given or earned plenty, it’s natural to want to share some of your wealth. Maybe you have a desire or higher calling to give out of the abundance you have received. Or you want to leave a legacy from your years of hard work by giving your wealth to benefit people, charities, and causes you are passionate about.
Whether you have been giving to charities or other organizations for years, or are just now starting to dip your toes into the waters of philanthropy, it’s important to know how to effectively maximize your gifts so it benefits both you and the recipient. Charitable giving is integral to your financial plan, whether that includes estate planning, generational wealth planning, or tax planning. Here we discuss a few ways you can maximize your charitable giving.
First, know that when planning your giving, the more intentional you are, the better. Donating to a charity can be personally fulfilling, but there are also tax benefits to be harnessed that financial planning can help you attain. For example, charitable giving is tax-deductible, but only if you itemize your deduction. When you take the standard deduction, your charitable giving does not affect your taxes. That being said, before simply writing a check to support your favorite charity, consider incorporating one of these giving strategies that could maximize your generosity.
Donor-advised funds (DAF) are charitable giving programs that allow you to combine the tax benefits of giving with the flexibility to support your favorite charities.
Contributions to your DAF can provide a current year’s tax deduction, then be invested to grow tax-free. This may result in more dollars for the organizations you support when you decide to transfer the assets. The funds allow you to contribute anything from cash to appreciated securities to real estate to life insurance that can help to further lower your tax bill. If you donate cash, you typically receive an income tax deduction of up to 50% of your adjusted gross income (AGI). If you donate appreciated securities, you save on the capital gains tax and your deduction will be the full fair market value, up to 30% of your AGI.
Once the money is out of your hands, you don’t have legal control over it. But you are the decision-maker when it comes to how the funds are invested and when they are distributed to the charities you recommend. According to the legal setup of these accounts, the organization that holds your DAF isn’t required to follow your “advice” but there’s an understanding that they will.
A simple example that takes advantage of tax benefits and minimizes your taxable income involves the required minimum distributions (RMDs) you are obliged by law to withdraw from your retirement accounts when you turn 72. But what if you don’t need that money for living expenses? Current tax law allows you to gift your RMD directly to a charity and avoid paying taxes on the distribution. This can be a great strategy for those with sufficient income streams who don’t want to pay excessive taxes.
If you own an IRA, you can use a qualified charitable distribution (QCD) to receive a tax benefit for your charitable giving, even if you take the standard deduction. A QCD is a distribution made from your IRA account directly to your charity of choice. It can count toward your required minimum distribution (RMD) for the year and it does not count toward taxable income. As such, you don’t have to pay any taxes on it.
A charitable remainder trust (CRT) is a trust that not only provides an income stream but passes the remaining value to charities of your choice when you or your beneficiary dies. It allows you to convert an appreciated asset into a lifetime income. With the trust, you technically donate the asset to charity before it is sold, which allows you certain tax benefits, including a charitable deduction. You will receive more income over your lifetime by using a charitable remainder trust than if you had sold the asset yourself, and you even gain creditor protection for it. It also provides other important tax benefits and, best of all, you get to contribute to charitable causes that are near and dear to your heart. And unlike DAFs, you always have control of the trust. Your trustee manages the assets but they must follow the instructions you have indicated and make changes per your direction.
All of your charitable contributions can be filed with your taxes, qualifying you for certain tax deductions and reducing your overall tax bill. Make sure to always ask for a receipt any time you donate (cash or non-cash) and file it safely with the rest of your financial documents and with your financial professional. Once tax season arrives, bring your receipts and your paperwork to your CPA so you can get an accurate picture of which tax deductions you qualify for. Always include a copy of your receipts with your tax forms as proof.
There’s no one-size-fits-all approach to giving because everyone’s circumstances are unique. Depending on the current state of your financial portfolio, there may be other ways to maximize your charitable contributions even more. That’s why it’s important to partner with a trusted advisor who can walk you through your options and help you make the best choices for your situation. Our team at Cypress Wealth Services would be happy to meet with you, take a look at your situation, and see how we can help you maximize your money. Call us at 866.888.6563 or contact one of our offices today.
Cypress Wealth Services is an independent RIA firm providing financial planning and investment management to high-net-worth individuals, families, business owners, and institutions. Cypress Wealth Services comprises professionals with diverse backgrounds and extensive experience and qualifications. Cypress Wealth Services serves a broad range of client needs using their experience and expertise to act as a foundation for their client service process. The firm uses The Second Growth, which focuses on efficiently protecting, growing, and transferring the wealth and legacy a person has already built to their loved ones. With financial advisors in Palm Desert, CA, Tustin, CA, Athens, GA, and Anchorage, AK, the firm serves clients across the country with Wealth Management Services, Fiduciary Services, 401(k) Design, and Management, Investment Reporting Services, Financial and Retirement Planning, and more. For more information, visit www.CypressWS.com or call 760.834.7250.
