Charitable giving is a profound expression of our faith, allowing us to extend God’s love and support to the causes and communities that matter most. As faithful stewards, it is our responsibility to ensure that our donations have the greatest possible impact. Fortunately, the tax code offers several strategies that can help us amplify our generosity while also optimizing our financial well-being.
In this comprehensive guide, we will explore the nuances of capital gains tax, the advantages of donating appreciated assets, the power of donor-advised funds, and the importance of strategic timing in charitable contributions. Understanding these principles will help you navigate the complexities of tax-efficient giving and maximize your kingdom impact.
UNDERSTANDING CAPITAL GAINS TAX
At the heart of tax-efficient giving lies the concept of capital gains tax. This tax is imposed on the profit realized from the sale of an asset, such as stocks, real estate, or digital currencies. The capital gains tax rate varies depending on how long the asset was held and the individual's income level.
Long-term capital gains, which apply to assets held for more than a year, are typically taxed at rates of 0%, 15%, or 20%, depending on the taxpayer's income bracket and filing status. In contrast, short-term capital gains, which apply to assets held for less than a year, are taxed at the individual’s ordinary income tax rate, which is often higher. This distinction underscores the value of a long-term investment strategy, as it can lead to significant tax savings when liquidating assets.
DONATING APPRECIATED ASSETS: A POWERFUL STRATEGY
One of the most effective ways to minimize your tax burden while maximizing your charitable impact is to donate appreciated assets directly to your chosen Christian ministry or church. By gifting these assets instead of selling them and then donating the proceeds, you can avoid paying capital gains tax altogether.
The process is straightforward: when you donate an asset that has appreciated in value, you are entitled to claim a tax deduction for the full fair market value of the asset, without having to pay taxes on the gains. This can increase the value of your donation by up to 20% compared to donating the cash proceeds from the sale of the same asset.
At the time of publication, the IRS allowed deductions of up to 30% of the donor’s adjusted gross income (AGI) for donations of appreciated stocks, bonds, or mutual funds held for more than a year. Cash donations, on the other hand, can be deducted up to 60% of AGI. By carefully structuring your contributions to take advantage of these limits, you can significantly reduce your taxable income while supporting the causes you care about.
Tools like the Charitable Appreciated Securities Tool offered by Fidelity Investments can help you identify the most highly appreciated securities in your portfolio, ensuring you maximize the potential tax savings. It’s important to understand the IRS rules governing the deduction limits for cash and securities, as this will guide you in determining the most advantageous proportions for your donations.
THE POWER OF DONOR-ADVISED FUNDS
Donor-Advised Funds (DAFs) have emerged as a popular and versatile tool for tax-efficient charitable giving. These funds allow you to make an irrevocable contribution, claim an immediate tax deduction, and then recommend grants to your preferred charities over time.
One of the key benefits of a DAF is the ability to contribute a lump sum in a high-income year, claim the deduction, and then distribute the funds to charities at your own pace. This “bunching” strategy can be particularly advantageous if it helps you exceed the standard deduction threshold in a given year, resulting in greater tax savings.
DAFs also offer flexibility in the types of assets you can contribute, including cash, securities, and even complex assets like privately held shares or cryptocurrencies. This inclusivity makes them an attractive option for donors with diverse investment portfolios.
Moreover, DAFs provide the option to give anonymously or to specify the intended use of the funds, such as contributing to a particular campaign or in memory of a loved one. This level of control and customization can be invaluable for donors seeking to align their charitable giving with their personal convictions and priorities.
STRATEGIC TIMING FOR MAXIMUM IMPACT
The timing of your charitable contributions can significantly affect the tax benefits you can claim. By aligning your giving with high-income years or the years leading up to retirement, you can potentially maximize the available tax deductions.
One effective strategy is to consolidate multiple years’ worth of contributions into a single tax year. This approach can be particularly advantageous if it enables your itemized deductions to exceed the standard deduction threshold, resulting in greater tax savings.
NAVIGATING THE COMPLEXITIES OF QUALIFIED CHARITABLE DISTRIBUTIONS
The Qualified Charitable Distribution (QCD) provision presents a unique opportunity for retirees to reduce their taxable income and support their favorite charities. Individuals aged 72 or older who are required to take required minimum distributions (RMDs) from their traditional IRAs can directly transfer up to $105,000 per year in 2024 to qualified charitable organizations, effectively excluding that amount from their taxable income.
This strategy can be particularly beneficial for retirees whose itemized deductions fall below the standard deduction threshold, as the QCD allows them to reduce their taxable income without having to itemize. By carefully coordinating their charitable giving and RMD planning, retirees can maximize the tax efficiency of their donations and support the causes they care about.
It’s important to note that the QCD rules and requirements can be complex, so consulting with a financial advisor is highly recommended to ensure compliance and alignment with your overall financial goals.
LEVERAGING CHARITABLE GIFT ANNUITIES
Charitable gift annuities offer another avenue for tax-efficient giving, particularly for those with appreciated assets or complex financial situations. By contributing a portion of your appreciated assets, such as stocks or real estate, to a charitable gift annuity, you can receive a tax deduction in the current year and a fixed income stream for the rest of your life.
This strategy can be especially beneficial for individuals anticipating a high-income year or those nearing retirement. By diversifying your assets and converting a portion of your appreciated holdings into a reliable income source, you can not only reduce your tax burden but also secure a steady stream of funds to support your living expenses in retirement.
The charitable gift annuity also allows the remaining assets to be distributed to your designated charity upon your passing, ensuring that your philanthropic goals are fulfilled even after you’re gone.
TESTAMENTARY CHARITABLE REMAINDER TRUSTS: GIFTING IRAS TO FAMILY AND CHARITIES
The passage of the SECURE Act has introduced new considerations for individuals who have inherited individual retirement accounts (IRAs). Under the new rules, most non-spouse beneficiaries of an IRA must liquidate the inherited account within 10 years, triggering a taxable event.
Testamentary Charitable Remainder Trusts (TCRTs) offer a solution to this challenge, allowing you to gift your IRA to both your heirs and your chosen charities. With a TCRT, your beneficiaries can receive a stream of income from the trust over a specified period, while the remaining assets are ultimately distributed to the charities you’ve designated.
This arrangement not only supports your giving goals but also helps your heirs avoid the immediate recognition of the inheritance as taxable income. By carefully structuring your estate plan with the assistance of a financial advisor, you can ensure that your IRA assets are distributed in a tax-efficient manner, benefiting both your family and the kingdom-building causes you hold dear.
MAXIMIZING THE IMPACT OF YOUR CHARITABLE GIVING
There are numerous strategies and tools available to help you maximize the impact of your kingdom-building giving while also optimizing your tax situation. By understanding the nuances of capital gains tax, leveraging the benefits of donating appreciated assets, utilizing Donor-Advised Funds, and strategically timing your contributions, you can significantly enhance the reach and effectiveness of your stewardship.
Equally important is the role of financial advisors who specialize in Christian philanthropic planning. These professionals can provide invaluable guidance, ensuring that your giving is seamlessly integrated into your overall financial strategy and aligned with your long-term goals. You may want to consider investigating the use of a Certified Kingdom Advisor®. Kingdom Advisors’ roots were planted in 1997 when Larry Burkett, cofounder of Crown Financial Ministries, brought together 16 friends and fellow professionals committed to biblically wise financial advice to form what would ultimately become Kingdom Advisors. Over the last two decades, Kingdom Advisors’ educational programs, community groups, and professional designation have grown from being accepted in the financial services industry to being an essential part of the Christian financial industry. To learn more, go to www.kingdomadvisors.com .
Remember, your generosity is not just a financial decision – it is a reflection of your faith and your commitment to making a lasting difference in the world. By embracing tax-efficient giving strategies, you can amplify your impact and honor God’s call to be faithful stewards of the resources He has entrusted to us.
NO OBLIGATION INITIAL CONSULTATION
At TruWealth Advisors, we are committed to clear and thoughtful counsel through which we hope to instill peace of mind knowing you are on the right path to achieving your goals. Contact us today for a no obligation initial consultation to explore options that best align with your personal financial goals.
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Disclosures
TruWealth Advisors, LLC is an SEC registered investment adviser located in Louisiana. Registration does not imply a certain level of skill or training. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or financial advice. You should consult your own tax, legal and financial professionals before engaging in any transaction. Past performance does not guarantee future results. Additional information about TruWealth Advisors, including our registration status, fees, and services is available on the SEC’s website at https://adviserinfo.sec.gov/firm/summary/306876.