Two Tax-friendly Vehicles for Charitable Giving

Since the IRS nearly doubled its standard deduction in 2017, a large number of taxpayers no longer itemize and, therefore, do not receive the associated deduction for charitable contributions on their tax return. But taxpayers may still garner a tax benefit from charitable giving with a little creativity. AAFCPAs and AAF Wealth Management advise that clients consider two tax-friendly vehicles for charitable giving including donor advised funds or the use of qualified charitable distributions (QCDs).

Donor Advised Funds

A donor advised fund is an investment vehicle administered by a third-party for the sole purpose of holding and managing charitable donations. Donor advised funds provide the ability to take that tax deduction up-front while still having the freedom to spread those contributions out over the course of several years. By using a DAF, you may itemize when you otherwise could not.

Take for example a taxpayer who normally donates $50,000 to charity over the course of five years. This individual could make a $50,000 donation to their charity of choice in year one and donate nothing in years two through five to get a higher deduction up-front. However, they may not want to give this to one charity upfront. To solve this, the same individual can use the stacking approach by depositing $50,000 into a DAF and receiving an immediate tax deduction on that full amount in year one while still enjoying the freedom to distribute smaller donations using those funds to various charitable organizations for any number of years thereafter. Because they stacked contributions into a DAF in year one, they could receive a much greater tax benefit than had they claimed smaller deductions across multiple years. Funds in a DAF also grow tax-free.

Another tax advantage is the ability to fund a DAF using appreciated stock, which is helpful for those with unrealized gains. When doing so, those funds can be contributed without needing to realize a capital gain while taking a deduction for the full fair market value of the stock donated. This is also helpful for reducing risk in your portfolio from a position that has become too large of a position through growth. You may also use privately held and S Corp stock, though there are some caveats to the latter. When you fund a DAF using appreciated stock, no taxes are due on capital gains.

Qualified Charitable Distribution

Qualified Charitable Distributions are another tax-savvy vehicle for charitable giving. QCDs let taxpayers over the age of 70 ½ donate up to $100,000 per individual, or for married couples $100,000 per spouse and up to $200,000 combined, to any number of charitable organizations directly from their traditional IRA. Donations made using this method count toward required minimum distributions (RMDs) but must be routed directly from the IRA to the charity. In other words, a taxpayer cannot withdraw from their IRA and then write a check to the charity.

QCDs are not taxable as are standard IRA distributions. So, they can reduce your Adjusted Gross Income (AGI), used to calculate Income-Related Monthly Adjustment Amount (IRMAA) Medicare surcharges, which are based on income.

Because QCDs can count toward RMDs, they can be especially beneficial for those with more than enough income but are still required to take RMDs. Keep in mind, though, that taxpayers must track their own donations or ask their tax advisor to do so for them. QCDs are not taxable on either a state or federal level.

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AAFCPAs and AAF Wealth Management work with clients to determine the best solution for their tax situation. If you have questions, please contact Daniel Seaman, CPA, Tax Partner at 774.512.4025 or, Jonathan Bloom, CFP®, AIF®, Director & Senior Wealth Advisor at 774.512.4081 or—or your AAFCPAs Partner.

About the Authors

Dan is a leader in AAFCPAs’ Tax Practice advising select clients, including high-net-worth individuals along with their families and business interests. He works extensively with AAF Wealth Management clients, helping to ensure the seamless execution of their holistic financial plans. He navigates the intricacies of compliance, taxation, wealth optimization, asset protection & privacy. Since joining the firm in 2007, Dan has embraced AAFCPAs’ integrated service model as key to client success. He recognizes that this combination of tax and wealth management expertise leads to better-informed decisions, increased tax efficiency, and an enhanced client experience—all contributing to greater success in achieving a clients’ financial goals.
Jonathan Bloom
Jonathan is an experienced and passionate Investment Advisor and Financial Planner with a commitment to independent client-centric advice. He has proven success earning trust advising high-net-worth individuals and retirement plan clients. He provides objective, customized solutions and a comprehensive approach to wealth management, which includes investment management, estate, tax, retirement, insurance, charitable giving, and cash flow planning.