As the leaves begin to change color, consider autumn-themed ways to give back by volunteering or giving. Charitable giving can help people in need while also providing retirees with purpose and fulfillment. However, tax considerations are critical in charitable gifts, especially for retirees living on fixed incomes.
In this article, we will look at tax-friendly charitable giving techniques that retirees can use to increase their contributions while minimizing their tax responsibilities. Here’s what you need to know.
1. Organize Your Donations
The “bunching” donations approach is an excellent way for retirees to boost their charitable giving. Donations are bundled when several years’ worth are combined into a single year. The Tax Cuts and Jobs Act of 2017 popularized this concept. Since the passage of this legislation, the normal deduction for 2023 is $13,850 for individuals and $27,700 for married couples filing jointly.
Retirees can itemize their deductions for that year, which may exceed the standard deduction limit. They can pick the standard deduction in subsequent years. This technique allows retirees to have a greater impact through charity gifts while simultaneously gaining tax benefits.
Donation bunching, on the other hand, is a multi-year strategy that requires commitment and effort. If you are facing significant financial uncertainties or other challenges that are impeding your capacity to follow through, there may be a better option. If you’re afraid that donation bunching will disrupt your support for the philanthropic causes you care about, think about how you might avoid or mitigate this before you commit. When it comes to bunching donations, your Fiduciary advisor should be able to advise you on the optimal technique.
2. Make use of Donor-Advised Funds.
Donor-advised funds (DAFs) have earned the moniker “the gift that keeps on giving.” It’s a popular option for retirees to give to charity. A DAF allows you to contribute a lump sum to a charitable account and receive an immediate tax reduction. Later, you can decide which charity to donate the funds to, spreading them out over time.
DAFs allow you to plan ahead of time, receive tax savings as you earn more, and support a variety of organizations while simplifying the charitable gift procedure. You can even set up a DAF with your adult children and appoint them as consultants on where the money is invested. Because DAFs allow for shared charitable giving, you can teach your children about your beliefs and how to give back. Even after you’re gone, the advisors you select can continue to donate to charities in your name.
3.Donate to Qualified Charities
A Qualified Charitable Distribution (QCD) can be an excellent approach for retirees who are at least 7012 years old. A QDC is a tax-free charitable contribution made from your IRA. While it is not a tax deduction, it can assist you avoid paying taxes on your IRA.
It is especially useful for those over the age of 72 who must take minimum distributions (RMDs) from their retirement accounts. Rather from being required to include an IRA contribution in your gross income, you can make separate charitable donations to a qualified charity from your IRA up to $100,000 each year.
The transferred amount counts toward their RMD but is not taxable income. This method can help you reduce your overall tax liability while also benefiting charitable causes.
4. Create a Charitable Gift Annuity.
A Charitable Gift Annuity (CGA) is a one-of-a-kind approach that allows retirees to make charitable contributions while receiving fixed-income payments for the rest of their lives. A CGA allows retirees to contribute assets to a charity organization in exchange for a regular annuity income. Charitable annuities are offered by many non-profit organizations and colleges.
A percentage of the initial giving is considered a generous donation and is tax deductible right away. The balance of the annuity payments is potentially taxable at a lower rate than other types of income. This technique provides retirees with charitable impact as well as financial security.
5. Align Your Adult Children’s Charitable Gifts
Even for retirees with large assets, the federal estate and gift tax does not pose a threat. The annual estate and gift tax deduction applies to each recipient’s gifts. Simply expressed, if you decide to give $17,000 to your children in 2023, the annual exclusion will apply to each gift. The table below details the particular amount of yearly exclusion applicable to the year of the donation.
6. Annual Exclusion per Donee for Year of Gift
|2011 through 2012||$13,000|
|2013 through 2017||$14,000|
|2018 through 2022||$15,000|
Source: Internal Revenue Service
Furthermore, even if wealthy, retirees are frequently in lower tax bands due to a lack of employment and a higher standard deduction. Their adult offspring, on the other hand, may be liable to higher tax brackets. So, why not extend the tax benefits of charitable giving to other members of your family?
In situations like these, it may be a wise approach to provide assets to your children with the understanding that they will donate the amount given to a charitable cause. While you will not obtain an income tax deduction, you will not be subject to the gift tax.
Consider the matter from your children’s point of view. They would not have to pay income or gift taxes on the received gift. Furthermore, donating this donation to a charity qualifies them for an income tax deduction. As a connected family, you can contribute to a worthy cause while also maximizing your tax savings. Working with an expert, such as a Fiduciary advisor, can ultimately help you through tax difficulties.
Collaboration with a Fiduciary Advisor
If you want to increase your money in retirement, hiring a financial counselor is a good place to start. Financial advisors are tax experts who can assist you make decisions that are in line with your financial goals.
Goodman Green Wealth Management assists clients in preparing for retirement through a variety of techniques, ensuring the optimum outcome tailored to your specific situation. We give advisory services in the following areas:
Tax planning and consulting all year
Income tax observance
Wealth management includes estate and gift tax preparation, as well as philanthropic giving.
Trusts for family members
Retirement planning, among other things
Using charitable giving tax techniques during retirement is critical for you to protect your retirement. Following these suggestions can help you support causes you care about while perhaps improving your financial situation.
We try to empower our customers through personal financial planning to make decisions that make them feel comfortable, free, and successful, and we inspire them to leave a legacy of charity and stewardship.
If it’s time to start thinking about your fall charitable giving strategy, we’re here to assist. Contact us immediately to set up your free strategy consultation.