As you start planning for your year-end gifting, take time to understand what options are available to you, and compare outcomes including the tax implications. 

Maximize your donations while minimizing the impact on your wallet. Families that want to make the most of their donations should talk to their financial or tax professional about how to stretch their dollars in tax-efficient ways. Below are three popular tax-efficient strategies to consider, whose benefits vary depending on the taxpayer’s age and income level. 

Qualified Charitable Distributions (QCD)  

A QCD is a distribution from an IRA paid directly to a qualified charity. Unlike taking an IRA distribution and then donating cash, a QCD does not count as income on your tax return keeping your aggregate gross income (AGI) lower. This provides more potential benefits such as a lower taxable portion of Social Security benefits, a lower threshold for deducting medical expenses and other itemized deductions, and less income applicable to Medicare Premium surcharges (i.e., IRMAA) and the 3.8% Net Investment Income surcharge. The QCD can also count towards your Required Minimum Distributions (RMD). If you already took your RMD, that’s not a problem. You can still make a QCD to your favorite charities. 

QCDs have continued to gain popularity since becoming permanent in 2015; however, they do have limitations. You may make QCDs only if you are age 70.5 or older on the day of distribution and QCDs continue to be ineligible for donation to donor-advised funds, private foundations or supporting organizations. New laws have expanded the rules for QCDs allowing donors to make a one-time election of up to $50,000 to fund certain charitable trusts or charitable gift annuities. Finally, while QCDs were previously limited to $100,000 per year, the limit is now indexed to inflation. In 2024, the QCD limit has increased to $105,000. 

Donate Appreciated Assets 

When you gift long-held appreciated assets to a charity, you can receive a charitable deduction for the market value of your donation, and you do not realize the capital gains since you did not sell the asset. For those with large unrealized capital gains, this can be a great option. Commonly gifted assets include securities and real estate. 

In the case of securities, you send the securities directly from your account to the charity. Be careful, however, as many charities do not accept certain types of assets. You should coordinate with the charity in advance as sometimes the hassle of selling an asset can outweigh the benefit of the gift. 

Donor-Advised Funds

This option is also becoming more popular. Instead of donating cash or securities directly to a charity, they can be donated to a Donor-Advised Fund (DAF). 

This allows you to receive a tax deduction in the year of the donation and retain some control over the assets donated. Typically, a mutual fund family or brokerage firm can provide access to a foundation that receives your donation and acts like an escrow account. This account holds the donated assets until you decide when and to whom to send those funds. The tax-deduction comes in the year contributions are made to the DAF, not when distributed from the DAF to qualified charities. 

If you have had an especially fortunate year, are looking for a larger tax deduction than usual, or would like to spread out the timing of your charitable gifts, DAFs are a wonderful solution. This strategy is common for business owners experiencing large capital gains from a business sale.

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