By Stephen W. Bedikian, Associate Wealth Advisor
Americans donated a staggering $484.85 billion to charity in 2021. For wealthy individuals and families, strategic charitable giving can be a powerful way to make a positive impact on causes they care about while also optimizing their tax bill.
We’ve worked extensively with many of you in helping you fine-tune your giving objectives and create vehicles for tax-smart philanthropy. For those who are just getting started with integrating charitable giving into their financial planning, this article highlights some of the key benefits, along with many effective giving strategies – and how they can work within a comprehensive financial plan.
The Tax Benefits of Charitable Giving
One of the many positives of charitable giving is the potential for significant tax benefits. Here are some key advantages:
Income Tax Deductions: Donations to qualified charities can be deducted from your taxable income, potentially lowering your overall tax bill.
Capital Gains Tax Avoidance: By donating appreciated assets like stocks or real estate directly to qualified organizations, you can avoid paying capital gains tax on the appreciation.
Estate Tax Reduction: Charitable bequests can reduce the size of your taxable estate, potentially lowering estate taxes for your heirs.
Understanding Charitable Giving Tax Deduction Limits
While the tax benefits of charitable giving are substantial, you need to stay aware of the deduction limits:
- Cash Donations: For 2024 you can deduct cash contributions of up to 60% of your adjusted gross income (AGI) in donations to public charities.
- Appreciated Securities: Donations of long-term appreciated securities to public charities are generally deductible up to a limit of 30% of your AGI.
- Private Foundations: Donations to private foundations have lower limits – 30% of AGI.
- Carryforward: If your donations exceed these limits, you can carry forward the excess to use in subsequent years..
Charitable Giving Strategies for Wealthy Individuals and Families
Donor-Advised Funds (DAFs)
DAFs can be a useful tool for managing your tax benefits and maintaining flexibility in your giving. You can contribute a lump sum to a DAF in a high-income year, receive an immediate tax deduction, and then make grants to charities over time.
Charitable Remainder Trusts (CRTs)
CRTs allow you to donate assets to qualified nonprofit organizations while retaining an income stream for yourself or other beneficiaries. This strategy can provide immediate tax benefits, ongoing income, and a meaningful charitable impact.
Qualified Charitable Distributions (QCDs)
For those aged 70½ or older, QCDs allow you to donate up to $105,000 (raised to $100,000 in prior years) annually directly from your IRA to qualified charities. This strategy can satisfy required minimum distributions (RMDs) without increasing your taxable income.
Private Foundations
While more complex to set up and manage, private foundations potentially offer high net worth individuals and families maximum control over their charitable giving and can help create a lasting family legacy. This can also be a way for families to involve their children and help them pass on their priorities and goals to the next generation.
Bunching Donations
With the higher standard deduction introduced in 2018 through the Tax Cuts and Jobs Act (TCJA), some clients may benefit from “bunching” multiple years’ worth of charitable donations into a single year to exceed the standard deduction threshold. The TCJA is currently set to expire December 31, 2025, and we are keeping tabs on the development of legislation in Congress that may extend or substantially retain much of the existing tax code. If the tax law is changed in a way that reduces the standard deduction, charitable giving strategies may need to adapt as a result.
Integrating Charitable Giving into Your Financial Plan
Charitable giving should be addressed and integrated in your financial planning. Here are some of the ways planning strategically can impact your financial life:
Goal Alignment: Ensuring that your charitable giving aligns with your overall financial goals and values.
Tax Strategy: Coordinating your gifts with other tax planning strategies to optimize your overall tax situation.
Estate Planning: Incorporating charitable bequests into your estate plan, should you wish to create a lasting legacy.
Investment Strategy: Considering the impacts of your donations on your investment portfolio, especially when donating appreciated assets.
Cash Flow Planning: Balancing charitable giving with other financial priorities and cash flow needs.
Strategic Planning That Encompasses Your Needs and Aspirations
Working with a team of professionals, including your financial advisor, tax professional, and estate planning attorney, you can develop a charitable giving strategy that maximizes your impact while optimizing your finances.
Ultimately, your charitable giving strategies should remain in alignment with your personal values and financial goals. Whatever causes and organizations you’re passionate about, strategic gifting can help you make a meaningful difference while also ensuring that all your financial commitments remain sustainable.
Please contact us if you’d like to initiate or extend your strategic philanthropic giving – or have questions about the right approach or vehicle for you. And please keep in mind that we’re nearing year end; opportunities for tax-advantaged giving for the 2025 tax year will end soon.
Disclosure:
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser with its principal place of business in Long Beach, California. HH may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of HH, please contact HH or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com.
