With tax law changes on the horizon, it is more important than ever to understand charitable giving and how it could impact you, your tax bracket, and your financial plan.
The good news? By integrating philanthropy into your financial plan, strategic giving can be incredibly rewarding, both for the causes you support and for your own financial future. Here are a few things to consider:
- How much would you like to donate? Start by deciding what you can comfortably allocate to your favorite causes, whether it’s a small recurring amount or a larger one-time contribution.
- Do you know where your dollars are going? Research organizations to ensure your contributions will have a meaningful impact. (CharityNavigator.org is a great tool for this!)
- Does your giving align with your tax planning? Beyond cash donations, explore tax-smart giving strategies. Donating appreciated assets (like stocks or mutual funds) can potentially offer significant tax advantages compared to selling them first and then donating the proceeds.
Tax Bracket Management
For high-earning executives and entrepreneurs, strategic philanthropy can be a powerful way to navigate your tax obligations. A significant liquidity event, like a bonus or the sale of company equity, can push your income into even higher brackets and trigger substantial capital gains exposure. It’s important to remember:
- Timing is Everything: Timing your gifts to coincide with high-income years or major financial milestones may help maximize tax benefits, offsetting liabilities from one-time events. Planning around your charitable goals allows you to create a multi-year impact.
- Appreciated Assets: One way to reduce capital gains exposure is by gifting appreciated assets directly to charity. Instead of selling a low-basis stock or privately held business interest yourself (and triggering capital gains tax), transferring the asset directly to a qualified charity can eliminate that gain for you.
- Beyond Capital Gains: Charitable giving can reduce broader income tax liabilities. For example, “bunching” multiple years’ worth of charitable deductions into a single high-income year can help you exceed the standard deduction threshold and itemize for greater tax benefits. For retirees aged 70½ and older, Qualified Charitable Distributions from IRAs offer a tax-efficient way to donate directly from pre-tax retirement accounts without increasing your Adjusted-Gross Income.
What is the right option for you?
Selecting the right charitable entity is important. Options range from public charities to Donor-Advised Funds, which offer flexibility and administrative ease. Tools like Charitable Remainder Trusts and Charitable Lead Trusts offer advanced solutions, providing income streams and estate planning advantages while benefiting charity.
For those seeking greater control, creating a private foundation is a consideration, but it can come with higher administrative costs. The ideal choice depends on you and your specific goals.
Let’s review your situation together!
We are here to help you weave your charitable goals into your financial plan. Contact us to discuss how you can make a philanthropic impact that is both intentional and strategic.