Charitable Giving in Retirement

Key Points – Charitable Giving in Retirement

Standard Deductions for the 2024 and 2025 Tax Years
Charitable Deduction Verification
What Assets to Use for Charitable Donations
Bunching Charitable Donations
QCDs and Donor-Advised Funds
10-Minute to Read

Charitable Giving in Retirement

As the end of the year approaches, many individuals make charitable donations to the charitable organizations they care about. Most charitable giving is for reasons other than the tax benefit. However, tax benefits are an important consideration that can help offset the cost of the donation.

Some taxpayers might have been surprised they didn’t receive a tax deduction for their charitable donations when filing earlier this year. This was because they took the standard deduction. The standard deduction is significantly higher under the Tax Cuts and Jobs Act. Under the current tax laws, nearly 90% of filers take the standard deduction according to Intuit TurboTax.₁ This means most taxpayers don’t receive a tax benefit from their charitable donations. With proper tax planning, you may still be able to receive a tax benefit from your charitable giving.

Charitable Deduction Substantiation Requirements

Charitable deductions have strict substantiation requirements. The first thing you need to do is to make sure the organizations to which you’re donating are qualified charities. Many organizations present themselves as charities, but donations to them don’t qualify for a charitable deduction. One way to verify the organization is a qualified charity is by using the tax-exempt organization search tool from the IRS.₂

Another resource you may want to look at is Charity Navigator.₃ This website allows you to find out about the financial health of a charity and the accountability and transparency charities.

Charitable Deduction Verification

Once you have determined which charity to give to, there are requirements to substantiate the actual charitable donation you make. This written acknowledgment must be received before you file your tax return to claim the charitable deduction. Per the IRS, “the written acknowledgment required to substantiate a charitable contribution of $250 or more must contain the following information:₄

Name of organization
Cash contribution amount
A reasonably detailed description (but not an estimate of value) of any property contributed
Verification that no goods or services were provided by the charity in exchange for the contribution
- If goods or services were provided in an exchange, a description and best estimate of the value of goods/services provided must be included. The same thing applies if the goods or services provided in exchange for the contribution were comprised solely of intangible religious benefits.

If you make non-cash contributions of more than $500 but not more than $5,000, you must obtain a written acknowledgment.₅ You must also file a completed Form 8283, Non-cash Charitable Contributions, with the return on which the deduction is claimed.₆ If these contributions exceed $5,000, you must also obtain a qualified appraisal for the donations before filing the return on which the deduction is first claimed.

What Assets to Use for Charitable Donations

Once you have decided to make a charitable donation, you need to determine what asset(s) to donate. You can give cash, securities, and other appreciated assets. Deductions are also available for donating items like used household items and clothing if they’re in, “good condition or better.”

Cash Donations

A cash donation is often the easiest way to make a charitable donation. Cash donations can be through cash, check, or credit card. You can take a charitable deduction for the donation amount minus the value of any goods or services you receive in return. The amount of the donation is included on Schedule A of your tax return and there are no other special forms you must complete.

Appreciated Securities

Many people sell securities such as stocks or mutual funds to generate cash as a charitable giving strategy. However, a more tax-efficient result may occur if instead of selling the security and giving the money, the appreciated security is donated directly to the charity. The charitable deduction for donating appreciated property to charity is generally the fair market value of the appreciated property.

An appreciated security is a publicly traded security that has increased in value since it was purchased. When using an appreciated security to make a charitable donation, it needs to be a security purchased over a year ago, so it’s considered a long-term asset. By donating the security rather than selling it first, you avoid paying capital gains tax on the growth. This means the more the security has appreciated, the greater the tax savings you’ll have.

Appreciated Securities Example

For example, let’s say you purchase five shares of a stock 10 years ago for $5,000 and those are now worth $30,000. You’ll pay a capital gains tax of $3,750 if you sell the security and your capital gains tax rate is 15%. If you donate the shares rather than selling them first, you can include the $30,000 as a charitable donation. This will allow you to avoid paying the capital gains tax of $3,750.

It may be difficult to donate securities if you believe they are still a good investment for your portfolio. If you donate the appreciated securities, you can then turn around and purchase new shares of the donated securities with the cash you would have given to the charity. This donate-and-replace strategy allows you to increase your cost basis on the new shares you own, potentially reducing the capital gains tax you pay in the future.

Even though it’s often beneficial to donate securities, there are some instances when cash is a better option. If you have securities that have lost value since you purchased them, then you should sell those shares and claim the taxable loss on your tax return. You can then donate the cash proceeds to charity. This results in a double tax benefit, as you get the benefit of both the capital loss and the charitable deduction. If you donated the loser shares, you would only be able to take a charitable deduction for the fair market value of the shares and would lose the capital loss deduction.

Charitable Deduction Limitations

There are limits to the amount of charitable deductions you can claim in the year for donations to public charities and private operating foundations. The limit for cash contributions is 60% of your adjusted gross income under the Tax Cuts and Jobs Act.₇ If you donate appreciated securities, you’re limited to 30% of your adjusted gross income for deducting the contributions of appreciated securities.

For most people, these limits don’t come into play. However, it’s important to be aware of them as it may impact whether you’re better off to donate cash, securities, or a combination of the two.

If you’re unable to use all the charitable deduction in one year, you may carry over the unused amount for up to five years. You can claim the carryover amount as a charitable deduction in the latter years, but the same adjusted gross income limitations will apply.

Bunching Charitable Donations

With the higher standard deduction amount, fewer people are getting a tax deduction for charitable giving. A tax strategy that has gained more popularity is to bunch charitable donations. This strategy may help some donors but not everyone. It’s usually most helpful for taxpayers who are close to the standard deduction amount.

Bunching means giving two or three years’ worth of charitable donations in one year. In addition to consolidating charitable donations, you should also consolidate other deductions into the same year to increase the itemized deduction amount. The tax benefit comes from itemizing deductions in one year rather than taking the standard deduction every year.

Bunching Charitable Donations Example

Sam and Samantha Smith are a retired couple. They receive Social Security benefits of $60,000 per year. In addition, they take $60,000 from IRAs throughout the year. They have a mortgage on their home and pay about $3,500 a year in mortgage interest. Their real estate taxes are about $2,500 per year on their home. Their out-of-pocket medical expenses are typically about $7,500 per year. They have state taxes withheld on their IRA distributions to make sure they don’t owe when they file their taxes. They give about $10,500 a year to charity.

Their itemized deductions are below the standard deduction amount. The standard deduction for the 2024 tax year is $29,200 for married couples filing jointly. It will be going up to $30,000 for the 2025 tax year.

But let’s say that they move some of their elective medical procedures to 2025 and pay for them now, pay half of 2025’s real estate taxes in 2024, and pay two years’ worth of charity in 2024. By changing when they pay some of their expenses, they can itemize in 2024. By bunching their donations, they can save about $4,500 in taxes.

However, one disadvantage of bunching charitable donations is the charity receives the entire amount of the donation in one year. Many taxpayers feel like the charity will expect the same donation next year, or they don’t want to give a significant amount in one year. One workaround to these issues is a donor-advised fund.

Donor-Advised Fund

Donor-advised funds make charitable giving more accessible and address many concerns taxpayers have about making a large donation in one year. The tax benefit for a donor-advised fund comes from a charitable deduction being allowed in the year the funds transfer to the donor-advised fund. You receive an immediate tax deduction. Instead of the funds going to the charity all in one year, you have flexibility regarding when to give to charities and the amount you want to donate.

A donor-advised fund is a type of charitable investment account individuals or families can use to support the charities of their choice. Once the funds reach the donor-advised fund, the money’s only use is for charitable purposes. Even though they are no longer technically your asset, you make suggestions to the trustee of the fund as to the charities to receive the funds. With a donor-advised fund, you can choose when to give to the charity and the amount.

Another benefit is the funds in the donor-advised fund grow tax-free. There’s no requirement to distribute funds within a specific timeframe. You can also name a successor trustee to replace you in case you die before all the funds are distributed to charities. This allows a family to establish a legacy of charitable giving which can continue for generations.

Establishing a donor-advised fund is beneficial for people who want to make a large donation in one year but may not know what charities they ultimately wish to receive the donation. A donor-advised fund may be a strategy to consider in a year when your income is higher than usual.

Donor-Advised Fund Example

Bob and Sally Jones are charitable people. At the end of the year, Bob will receive a severance payout of $135,000. Bob is retiring, so their income will be much lower in the future. Bob and Sally would like to get a sizable charitable deduction this year to help offset the taxes due on the payout. However, they don’t want to give it all to charity this year. A donor-advised fund is an option they may want to consider. Typically, they give $12,600 per year to charity, which results in them taking the standard deduction and receiving no tax benefit for their charitable giving.

This year, they decide they would like to contribute $75,600 to a donor-advised fund. These funds will be used over the next six years to satisfy their charitable bequests. By utilizing this charitable giving strategy, they save $14,475 on their federal taxes as they can itemize their deductions this year rather than taking the standard deduction.

Qualified Charitable Distributions

Once you turn 70½, another charitable strategy to consider is a Qualified Charitable Distribution. A QCD allows you to have funds from an IRA transferred directly to a charity. You can make a tax-free distribution of up to $105,000 annually. Married couples each have their own $105,000 limitation. The distribution also helps satisfy your Required Minimum Distribution.

Coordinating the use of Donor Advised Funds with QCD planning can result in significant tax reduction. For example, funding your donor advised fund at age 65 with enough funds to fund charitable contributions until age 70½ when you would switch to making your charitable contributions directly from your pre-tax IRA. Charitably inclined IRA owners should consider their future charitable contributions with their Roth conversion strategy. They will want to leave enough in the pre-tax IRA to fund future charitable contributions.

Reducing RMDs

Additionally, your estate documents should be reviewed to determine if you have a bequest to a qualified charity. It may be better to remove that provision and name the charity as a beneficiary of a portion of your pre-tax IRA. If you are in a position, you don’t need the funds in the IRA, you can satisfy the bequest in advance of death by taking advantage of the large tax-free annual distribution limit. This will reduce future RMDs immediately, and make sure your heirs inherit assets that are more favorable from a tax perspective.

With the increase in the standard deduction amount, this method of making charitable donations became even more valuable as you don’t have to itemize to get the tax benefit from the distribution. It’s also beneficial if your charitable giving is so abundant that it’s limited by the 30% and 60% adjusted gross income limits.

Once Bob and Sally Smith reach age 70½, they can start giving via QCDs. If they take $12,600 out of their IRA and then turn around and give it to charity, then they’ll have to pay tax on the $12,600. However, if they have the $12,600 sent directly to the charity of their choice, they won’t have to pay tax on the $12,600. If Bob and Sally are in the 22% tax bracket, they’ll save about $2,700 in federal taxes by utilizing the QCD.

Certain charities are ineligible to receive QCDs. The ineligible charities include donor-advised funds, private foundations, and supporting organizations, as described in IRC Section 509(a)(3).₈ You’re also not allowed to receive any benefit in return for your charitable donation. For example, if your donation covers the cost of a dinner at a charitable event, your distribution wouldn’t qualify as a QCD.

Designated Fund or Scholarship Fund

Sometimes bunching the QCD amount can result in tax savings similar to what was discussed above. However, many people don’t want to make a large, lump-sum donation. A potential solution is to establish a designated fund or a scholarship fund. Assets held in both these funds grow tax-free.

If you want to support one specific charity with your QCD, then you can establish a designated fund. Like a donor-advised fund, the designated fund receives the QCD in one year. However, you can choose when to distribute the funds to the designated charity. If there are multiple charities you wish to support, you can establish multiple designated funds.

You can also set up a scholarship fund to be the recipient of your QCD. You can set the award criteria and serve on a selection committee to choose the scholarship recipients. This option also allows your funds to distribute over the years. There are many possible tax benefits from making a more significant QCD.

You may lower your tax bracket as you’re required to include less income in your taxable income calculation.
There is the possibility that a smaller portion of your Social Security benefit may be subject to income tax.
Your Medicare premiums may be lower in a couple of years as you can reduce your adjusted gross income.
You may reduce your state income taxes as some states have certain deductions or exemptions that apply based on your adjusted gross income.

Charitable Remainder Trusts and Charitable Lead Trusts

As we begin to wrap up this article on charitable giving in retirement, we want to shift gears to discussing charitable remainder trusts and charitable lead trusts.

Charitable remainder trusts are constructed so that your beneficiaries can receive income (either a set percentage over their lifetime or for a set time period). Once the beneficiary passes on or that time period ends, the remainder of the funds will go to a charity of your choice.

It’s the exact opposite with charitable lead trusts. The charity of your choice receives income over your lifetime or set period of time, but once you pass on or that set period is up, the rest of the funds will go to your beneficiaries.

Charitable Remainder Trust Example

Here’s an example of how a charitable remainder trust could work. Let’s say that you’re a dentist and you own the building that your practice is in. The building is worth $2 million, and you have amassed more than throughout your career. When you retire, you’d like to gift that building to your alma mater. However, your spouse has other ideas and thinks that the money should go to your children. A charitable remainder trust makes it possible for money to go to your children and your alma mater.

If you give the building to the charitable remainder trust today, you and your spouse can continue to take income from the trust. You’ll also get a tax deduction when you give the building to the trust. It’s based on the net present value of the future gift. Your kids will end up getting income via an irrevocable life insurance trust, which sets outside of the estate so it isn’t included in federal estate taxes.

Remember that life insurance proceeds are federal income tax-free. So, in this instance you would purchase a $2 million insurance policy and use part of the rent to pay for it. At the end of the day, your alma mater gets the $2 million building and your children get $2 million in tax-free income.

Review Our Tax Reduction Strategies Guide While Considering Your Charitable Giving Options in Retirement

You can also learn more about the overall importance of forward-looking tax planning in our Tax Reduction Strategies guide. Remember that your focus should be mitigating taxes over your lifetime, not just in one year. Download your copy of the Tax Reduction Strategies guide below.

We know that most people receive personal satisfaction from philanthropy. Modern Wealth Management works with you to develop a charitable giving strategy that maximizes the benefit to your financial plan by minimizing your income taxes today and estate taxes in the future. We can try to help you determine the best assets to donate, the timing of the donation, and the vehicle to use to donate. You can start a conversation with our team to discuss charitable giving in retirement and various other financial planning needs.

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We hope you’ve found the information we’ve shared about charitable giving in retirement to be beneficial. It’s amazing how much of a difference you can make through these charitable giving strategies.

Resources Mentioned in This Article

Downloads

Tax Reductions Strategies

Other Sources

[1] https://turbotax.intuit.com/tax-tips/tax-deductions-and-credits/tax-deduction-wisdom-should-you-itemize/L8Ln7K0Gp

[2] https://apps.irs.gov/app/eos/

[3] https://www.charitynavigator.org/

[4] https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contributions-written-acknowledgments

[5] https://www.irs.gov/taxtopics/tc506

[6] https://www.irs.gov/pub/irs-pdf/f8283.pdf

[7] https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions

[8] https://www.irs.gov/charities-non-profits/section-509a3-supporting-organizations

Investment advisory services offered through Modern Wealth Management, Inc., a Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management a Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.