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How To Maximize Charitable Gifts in your Retirement Plan

Published on: Feb 20 2022
estate planning

Too many people, even financial advisors, wrongly believe charitable gifts are something to consider only near the end of the year.

The benefits of charitable gifts often are maximized when you think about gifts early in the year and throughout the year.

Also, consider benefits other than tax deductions, and integrate charitable giving with the rest of your retirement and estate plans.

While writing a check to charity is easy, multiple benefits often are reaped through other charitable giving strategies.

Because the standard deduction was doubled in the 2017 tax law, fewer people deduct their contributions.

You must itemize expenses on Schedule A to deduct charitable gifts, and that means all your itemized expense deductions have to exceed the standard deduction.

Since 2017, a minority of taxpayers can deduct itemized expenses. Bunching several years of planned charitable contributions into one year ensures you can itemize expenses on Schedule A and receive a tax benefit from contributions.

A good way to bunch contributions is to contribute a lump sum to a donor-advised fund (DAF). You take a tax deduction the year the contribution is made.

But you can distribute the money to charities over time in any pattern you want. In the meantime, the contribution is invested tax free.

You don’t need cash to make a contribution to a donor-advised fund or to any other charity.

One of the best ways to make charitable contributions is to donate appreciated investments, such as stocks, mutual funds, real estate, cryptocurrencies and more.

Many donor-advised funds and charities will accept a wide range of assets.

When you donate appreciated investment property, you receive a tax deduction equal to the fair market value of the property on the date of the gift.

In addition, no capital gains taxes are due on the appreciation that occurred while you owned the property. In other words, you receive the full benefit of the pre-tax value of the investment.

When you plan to contribute to charity anyway, donating an appreciated investment often generates more after-tax wealth than writing a check to charity and separately selling the investment and paying taxes on the gain.

Those are two benefits from charitable contributions: tax deductions plus sheltering capital gains from taxes when appreciated property is donated.

A third potential benefit is lifetime income.

There are several ways charitable gifts generate lifetime income. You can make a contribution to the charity in return for a charitable gift annuity.

The annuity pays income to you for either life or a period of years, whichever you select.

You can schedule the income to begin immediately or at a later age.

You’ll receive a lower income payment than you would from a commercial annuity, and the difference is a gift to the charity. The present value of the gift to the charity is deductible in the year you make the gift.

For example, Max and Rosie Profits, a married couple ages 66 and 65, respectively, make a $100,000 cash contribution to a charity in return for a charitable gift annuity.

Lifetime payments are to begin immediately. The Profits will receive a charitable contribution deduction of $27,766 this year.

Each year they’ll be paid $3,900, no matter how long they live.

For 24.5 years, $2,948 of the payments will be tax free and only $951 will be taxed as ordinary income. After that, the entirety of each payment will be taxed as ordinary income.

The details are subject to change each month as interest rates change.

If the Profits fund the annuity with a donation of appreciated property instead of cash, their gain on the property will be taxed as part of their annual income pro rata over their life expectancy.

Another gift that generates annual income is the charitable remainder trust.

You donate cash or appreciated property to the trust.

The trust sells any property tax free and reinvests it. You receive annual income from the trust for either life or a period of years, whichever you decide.

The payments can be either a fixed amount (known as a charitable remainder annuity trust) or a fixed percentage of the annual trust value (known as a charitable remainder unitrust).

After you pass away or the income period ends, the charity receives whatever is left in the trust, called the remainder interest.

In either case, you receive an immediate tax deduction equal to the present value of the charity’s estimated remainder interest.

There’s no current tax on the appreciation of the investment. Instead, part of each income payment will be taxed as a long-term capital gain for your life expectancy.

For example, suppose Max and Rosie Profits contribute $100,000 cash to a charitable remainder unitrust trust.

The trust will make immediate annual payments of 5% of the trust’s value. The payments will vary with the investment performance of the trust, but the first year’s income will be $5,000 and will be paid quarterly.

The Profits will receive an income tax deduction of $34,308 the year they contribute to the trust. The IRS has limits on the income that can be paid by a charitable remainder trust if you want to deduct part of the contribution.

IRAs are another good way to make charitable gifts. Anyone who is charitably inclined and older than age 70½ should consider making qualified charitable distributions (QCDs) from a traditional IRA.

In a QCD, you tell the retirement account custodian to distribute part of the account directly to a charity.

You receive no deduction, but the distribution isn’t included in your gross income. Plus, if you’re taking required minimum distributions (RMDs), the contribution counts toward your RMD for the year.

So, you receive credit for taking the RMD without having it increase your gross income.

A paid-up permanent life insurance policy you no longer need can generate tax benefits if you give the policy to charity.

When you transfer a policy with a paid-up value to charity, you qualify for a charitable contribution deduction equal to the paid-up value. The charity will name itself the beneficiary.

The life insurance benefits won’t be included in your estate and will benefit the charity. When the life insurance isn’t fully paid up, you can transfer ownership to the charity.

You make contributions to the charity to pay the premiums. You qualify for a charitable contribution deduction for the premium payments.

There are a number of ways to make charitable gifts that generate tax deductions and potentially other benefits.

Begin planning early in the year, and you’ll not only benefit charity but increase your after-tax wealth.



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