With evolving tax laws and the end of year fast approaching, now is the time to take advantage of strategies that amplify your clients’ charitable giving potential. Many of the tax provisions from the Tax Cuts and Jobs Act (TCJA) of 2017 are set to expire on Jan. 1, 2026. With a Republican President-elect and Republicans controlling the House of Representatives and the Senate, there is a possibility that certain TCJA tax provisions could be extended by a process known as “budget reconciliation.”
This is a special legislative process that allows for only a simple majority of Senate votes to pass budget-related bills, which may include tax laws. Budget reconciliation has rules to keep the focus on the budget, and tax law changes made through budget reconciliation are often temporary given that they must fit within the budget’s impact limits over a set time frame. Over the years, several tax laws have been enacted through budget reconciliation, including the TCJA. Because of this, many people may decide to wait until 2025 to see if more complex tax planning measures need to be considered.
In the meantime, charitable giving can be a powerful tool to guide clients through planning for income, capital gains and estate tax under the current laws. Implementing the three strategies below between now and year-end will maximize clients’ giving efforts while providing tax-efficient strategies for their 2024 income taxes. Additionally, strategically using causes clients care about to plan for their financial future may provide both tax benefits and personal fulfilment. It can be a win-win for clients and their portfolios.
Strategically using causes clients care about to plan for their financial future may provide both tax benefits and personal fulfillment.
Donor-Advised Funds (DAFs)
A DAF offers a versatile and tax-efficient solution to maximize a client’s charitable impact. To do so, an investment account is opened with a sponsoring organization, such as a financial institution, which allows the client to contribute assets and receive a personal income tax deduction. Then, the client recommends when to actually grant a distribution from the DAF to a qualified charity.
While the assets are irrevocably contributed to the DAF, the client determines which charities receive a grant and when they receive it. It is also easy for the client to select new or different charities to donate to from time to time, making charitable giving flexible. DAFs may be a preferred option for those clients seeking an immediate income tax deduction and long-term flexibility when it comes to charitable giving.
Why it’s beneficial: This provides an immediate income tax deduction of up to 60% of Adjusted Gross Income (AGI) for cash or 30% for securities. If the full deduction is not taken in the first year, the deduction can be carried forward five years. Plus, the client’s contributions can grow tax-free, amplifying their charitable impact.
Who it’s for: Clients seeking an immediate income tax deduction but seeking flexibility; they can take their time in deciding which charities receive a grant.
Qualified Charitable Distributions (QCDs)
Clients aged 70 ½ or older can direct a Qualified Charitable Distribution from their traditional IRA directly to a qualified charitable organization. This strategy not only benefits the charity but prevents the amount of the QCD from counting as taxable income to the client. In 2024, individuals can donate up to $105,000 via QCDs.
QCDs satisfy part or all of an RMD and avoid income tax on RMDs by directing those funds to charity instead.
Why it’s beneficial: QCDs satisfy part or all of a required minimum distribution (RMD) and avoid income tax on RMDs by directing those funds to charity instead. A QCD uses pre-tax IRA dollars for impactful giving.
Who it’s for: Retirees with IRAs who don’t need their RMDs for personal expenses or who want to reduce taxable income.
Charitable Remainder Trusts (CRTs)
A Charitable Remainder Trust is a tax-exempt irrevocable trust that provides both a tax and financial benefit to the client or other beneficiaries while also benefitting the charitable organization. To take advantage of this strategy, a client irrevocably contributes assets to a CRT which immediately removes the assets from their taxable estate, while simultaneously qualifying for an income tax deduction.
Although a CRT is created with an ultimate charitable purpose, it makes annual distributions to the client or other beneficiaries for a predetermined term, such as the client’s lifetime or for a period of years. At the end of the term, the remainder of the CRT assets are distributed to the pre-designated charitable organization.
Although a CRT is created with an ultimate charitable purpose, it makes annual distributions to the client or other beneficiaries for a predetermined term.
Why it’s beneficial: CRTs offer an immediate income tax deduction of up to 60% of AGI for cash or 30% for securities. If the full deduction is not taken in the first year, the deduction can be carried forward five years. In addition, a qualified CRT is able to sell appreciated assets without paying capital gains taxes. Assets contributed by the client to the CRT are removed from their taxable estate, potentially reducing estate taxes.
Who it’s for: Donors with highly appreciated assets seeking to minimize capital gains tax or estate tax exposure, and those clients looking for a gifting strategy that provides an income stream while making a long-term impact on a charitable cause.
Act Before Year-End
While clients are in the giving spirit this holiday season, advisors can offer DAFs, QCDs and CRTs (with the help of an attorney) to ensure their giving is further maximized. Integrating these strategies can help them meet their tax planning needs on 2024 income tax as we approach the end of the year.
April Rosenberry is Director of Estate, Tax, and Financial Planning at Signature Estate & Investment Advisors.
