Charitable giving has broad connotations. It can range from a one-off donation because the puppies in an advertisement tug at one's heartstrings -- to part of a more organized structure. When charitable giving becomes part of a well-thought-out plan, it might be called 'philanthropic planning' or 'strategic philanthropy.'
Introduction: The Importance of Strategic Philanthropy
In the case of strategic philanthropy, the decisions around such giving result from a greater analysis of how it connects with your personal values, impacts your community and provides financial benefits. Strategic philanthropy can provide significant tax deductions while supporting meaningful causes, particularly for high-net-worth individuals.
As days get shorter and nightfall seems to come earlier and earlier, it's natural to start thinking of things you want to achieve before the year ends. Among those things are the philanthropic ideas you've had but never followed up on.
Countless opportunities exist throughout the year and will be explored in the second part of this article. For now, let's focus on meaningful and tax-efficient contributions you can make before year-end that are still valid in this year's tax reporting.
Year-End Charitable Giving Opportunities
Donor-Advised Funds (DAFs). A Donor Advised Fund is a philanthropic vehicle where you can make a charitable contribution of assets, receive an immediate tax deduction and spread out the actual charity grants over time. It offers flexibility, tax efficiency and the ability to grow funds tax-free before distributing them. Contributions made by December 31 can still count toward your 2024 deductions, even if the funds are distributed in future years. WH Cornerstone has a detailed guide called "Understanding Donor Advised Funds" that can be accessed here.
A DAF may offer an additional opportunity if you anticipate capital gains: funding a DAF with appreciated assets might maximize tax efficiency. For example:
Susan, a successful business owner, donates appreciated stock to a DAF in December. She secures a 2024 tax deduction and avoids capital gains tax while retaining flexibility, planning to support her favorite environmental charities over the next few years.
Qualified Charitable Distributions (QCDs) from IRAs. If you are 70½ or older, you can direct up to $105,000 ($210,000 for married couples filing jointly) per year tax-free from your IRAs directly to qualifying charities by using a QCD. A QCD doesn't qualify for a charitable deduction, but using one can help lower your tax bill while meeting your philanthropic goals. If you are subject to Required Minimum Distributions (RMDs), this strategy counts towards those requirements without increasing taxable income.
Contributions must be made by December 31 to apply to the 2024 tax year. Here is an example:
At 72, Philip wants to reduce his taxable income from RMDs. He uses a QCD, directing $40,000 from his IRA to a local food bank by December 31. The distribution satisfies part of his RMD, helping him minimize taxes while supporting a cause he cares about.
Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs). CRTs and CLTs both involve one or more assets being placed in a trust, where an income stream goes to one or more parties while the trust exists. Whatever assets remain in the trust will be distributed to one or more parties when the trust’s term ends.
With a CRT, income from the trust is paid to a designated beneficiary until the trust ends, when the remaining assets go to the charity or charities you have selected. This arrangement offers tax benefits while fulfilling your legacy planning goals. With a CLT, the charity gets the 'lead' interest or first access to the income. When the trust's term ends, the remaining assets are distributed to the trust's creator (grantor trust) or designated beneficiaries (non-grantor trust). It is a means of preserving wealth for your heirs and reducing possible estate or gift taxes.
Setting up a CRT or CLT before year-end allows you to lock in tax deductions for 2024. For example:
Sylvia establishes a CRT before year-end, funding it with appreciated real estate. She receives a significant charitable deduction and sets up income for herself, knowing that the remainder will benefit an educational foundation that changed her life.
Bunching Contributions. If you tend not to exceed the standard deduction threshold each year, "bunching" may be a strategy of interest. In this tax strategy, you would consolidate several years' worth of charitable contributions into a single year to exceed the annual deduction threshold to itemize and thus maximize your deduction while supporting your preferred charities.
One possibility is to pair this strategy with a DAF so you spread out the impact of the contributions while capturing the most significant deduction in a single tax year. For example:
Jim and Lisa plan to give $10,000 annually to charity but won't exceed the standard deduction. This December, they "bunch" three years of contributions, donating $30,000 to their DAF and maximizing their 2024 deduction while allowing grants over time.
Non-Cash Donations
Non-cash donations, such as securities, real estate or personal property, allow donors to contribute assets other than cash to a charity. These donations can provide significant tax benefits, including avoiding capital gains taxes and deducting the asset's fair market value.
Appreciated Securities and Real Estate. If you donate appreciated stocks or other non-cash assets that you've held for over a year, you may be able to avoid capital gains taxes on the asset's growth. At the same time, you can receive a charitable deduction equal to its full fair market value. Both you and the receiving charity can benefit from this strategy by maximizing the gift's value. It's essential to keep records for valuation purposes and to make the contribution by December 31 for a deduction on this year's taxes.
Tangible Personal Property. Tangible personal property refers to physical items like artwork, antiques or collectibles that you donate to a charity, often for use in its mission or in a sale to raise funds. You may deduct the item's fair market value if the donation aligns with the charity's purpose. Be sure to refer to IRS guidelines to understand eligible donations. Donating such property by December 31 can provide a deduction equal to its fair market value.
How to Ensure Compliance and Maximize Tax Benefits
Remember that all donations must be made by December 31, 2024, to qualify for 2024 tax deductions. Also, you must itemize deductions to claim charitable contributions.
Careful record-keeping is essential. You will want to keep detailed records, including contribution receipts, asset valuations and IRS Form 8283 for non-cash donations. You also want to confirm that all charities you choose are IRS-qualified 501(c)(3) organizations to make you eligible for deductions.
Consulting with advisors is key, particularly for more complex charitable giving. Your tax professionals and financial advisors can confirm that your deductions are maximized and that your chosen strategies align with your overall financial goals.
By leveraging these strategies before year-end, you can potentially reduce your 2024 tax liability while supporting the causes you care about.
WH Cornerstone has extensive experience working with individuals and couples seeking to make a lasting impact by aligning their giving with causes they're passionate about. For so many, consciously building a philanthropic legacy is how that legacy endures beyond financial considerations by enhancing the community and your long-term values. To explore all possibilities – either for the near term or more extensively for the future – schedule a call with us soon. We're here to help.