As you transition into retirement, charitable giving can play a significant role not only in fulfilling social and emotional voids but also in offering substantial tax benefits.
For retirees, strategic charitable donations can reduce tax liabilities, provide financial security, and create a lasting legacy.
Understanding Tax Benefits of Charitable Giving
Retirement opens unique charitable giving opportunities outside of cash donations. These assets provide significant tax benefits that may not be as accessible or beneficial to younger individuals.
“After clients retire and are living off their savings – and maybe a limited withdrawal amount – making sure charitable expenses are done in an optimal manner – just like any other retirement expense – becomes even more important,” shared Lorenzo Sanchez, CFP, partner and senior wealth advisor at Pathview Wealth Advisors.
Each type of asset donated includes its own set of tax benefits and deductions. Here are some of the most common for retirees.
1. Qualified Charitable Distributions(QCDs)
QCDs allow individuals aged 70½ or older to donate up to $100,000 per year directly from their Individual Retirement Accounts (IRAs) to qualified charities or eligible funds at community foundations.
Tax Benefits
- Tax-Free Withdrawals: Your distribution (up to $100,000 per year directly from their IRA to a charity) is not included in taxable income.
- Satisfies RMD Requirements: QCDs count toward the required minimum distributions (RMDs) from IRAs, potentially reducing your tax burden associated with mandatory withdrawals.
- Reduces Adjusted Gross Income (AGI): By lowering your AGI, QCDs can decrease your overall tax liability and potentially reduce the impact on other tax-related items, such as Medicare premiums and Social Security taxes.
2. Donor-Advised Funds (DAFs)
A DAF is a charitable giving account that allows you to make tax-deductible donations and then recommend grants to your favorite charities over time.
Tax Benefits
- Immediate Tax Deduction: You receive an immediate tax deduction for the full amount of their contribution to aDAF, providing significant tax savings in the year of your donation.
- Avoidance of Capital Gains Tax: By donating appreciated assets to a DAF, you can avoid paying capital gains tax on the appreciation, maximizing your gift amount and impact.
- Flexible Grant Timing: You can take your time recommending grants to charities or initiatives, allowing you to strategically distribute funds after benefiting from the initial tax deduction.
3. Donating Appreciated Assets
Donating appreciated assets, such as stocks, mutual funds or real estate, directly to charity allows retirees to maximize support for your favorite charities and initiatives.
Tax Benefits
- Avoid Capital Gains Tax: You can avoid paying capital gains tax on the appreciated value of the assets, maximizing the value of the donation.
- Fair Market Value Deduction: You can claim a charitable deduction for the full fair market value of the donated assets, subject to certain limitations.
- Reduced Taxable Income: Donating appreciated assets reduces taxable income, potentially lowering overall tax liability.
4. Charitable Gift Annuities (CGAs)
A CGA involves donating a sum of money or assets to a charity in exchange for a fixed annuity payment for life.
Tax Benefits
- Immediate Partial Tax Deduction: You receive an immediate partial tax deduction based on the gift’s value minus the annuity payments.
- Tax-Free Portion of Annuity Payments: A portion of each annuity payment may be tax-free, providing tax-advantaged income for life.
- Avoidance of Capital Gains Tax: When appreciated assets are used to fund a CGA, capital gains taxes can be partially or completely avoided, enhancing overall tax benefits.
5. Charitable Remainder Trusts (CRTs)
CRTs are irrevocable trusts that provide income to you or other beneficiaries for a specified period, with the remaining assets going to a designated charity.
Tax Benefits
- Income Tax Deduction: You receive an immediate income tax deduction for the present value of the remainder interest that will eventually go to the charity.
- Avoidance of Capital Gains Tax: By transferring appreciated assets to a CRT, you can avoid paying capital gains taxes on the sale of those assets.
- Estate Tax Reduction: Assets placed in a CRT are removed from your estate, potentially reducing the estate tax burden on your heirs.
6. Charitable Lead Trusts (CLTs)
A CLT is the reverse of a CRT. It provides income to a charity for a specified period, after which the remaining assets are transferred to your beneficiaries.
Tax Benefits
- Estate Tax Reduction: CLTs help reduce your taxable estate by transferring assets out of your estate, potentially lowering estate tax liabilities for heirs.
- Gift Tax Savings: Assets transferred to a CLT can reduce gift tax costs, as the value of the charitable interest is deducted from the total gift amount.
- Income Tax Deductions: You may receive an immediate income tax deduction for the present value of the income interest given to the charity.
Learn More
Charitable giving during retirement offers a unique opportunity to reduce tax liabilities while making a meaningful impact in the San Diego region.
By understanding and utilizing strategies like QCDs, donating appreciated assets, CGAs and more, you can maximize their philanthropic efforts and enjoy substantial tax benefits during your retirement.
“It is important to budget for and include charitable donations in your financial plan,” said Sanchez. “Don’t think of charity as something that happens only if there is ‘extra’ money to spend.
“Rather, include it from the start just like any other spending or lifestyle goal… to maximize giving at every instance.”
Start exploring retirement philanthropy strategies today with San Diego Foundation.
