"You must pay taxes. But there's no law that says you gotta leave a tip." -- Morgan Stanley

The holiday season is a time for more than just celebration—it’s a time to reflect on the year, appreciate what we’ve accomplished, and take stock of our lives. For many, it’s also a time for giving, whether it’s a thoughtful gift to loved ones or a charitable donation to those in need. It’s a chance to show kindness and contribute to causes that make a real difference. But did you know that giving to charity doesn’t just feel good—it can also provide tax benefits? Charitable contributions can help you lower your taxable income, which in turn reduces the amount of taxes you owe. Let’s take a deeper dive into how you can maximize your giving, not just for the cause, but also for your own financial benefit.

The 2 tax advantages of standard charitable giving

Charitable giving isn't just about spreading goodwill; it can also be an effective way to manage your taxes. The government encourages charitable contributions by allowing taxpayers to deduct donations from their Adjusted Gross Income (AGI), lowering their taxable income for the year. This means that donations to qualified charities can reduce the amount of income that gets taxed, ultimately reducing your tax liability.

There are two major tax advantages to charitable giving that you should know about:

1. Lowering your income tax bill: By donating to a registered charity, you can deduct a portion of your AGI from your taxable income, reducing the amount of income subject to taxation.
2. Avoiding gift taxes: Donations to charitable organizations are exempt from gift taxes. This means you can give generously without worrying about paying taxes on the value of your gifts, which is particularly beneficial if estate taxes are a concern for you.

Boost Your Tax Benefits with a Donor-Advised Fund

For regular donors, the standard deduction introduced by the Tax Cuts and Jobs Act of 2018 often limits tax benefits from itemized deductions. A donor-advised fund (DAF) can change that.

How It Works:

• Make a substantial one-time donation in a given year (e.g., $75,000).
• The DAF distributes this amount to your chosen charities over the course of several years (e.g., $15,000 per year for five years).
• By contributing a large sum in a single year, you increase your tax deductions in that year, while continuing your charitable giving for several years.

Example: Save $22,500 in Taxes

Let’s say you typically give $15,000 annually to charity, which is just under the standard deduction threshold. You wouldn’t receive any significant tax benefits from this donation under the new tax laws.

But, if you donate $75,000 to a Donor-Advised Fund, and direct the fund to give $15,000 annually to your charities for the next five years, you’ll be able to deduct $60,000 in that year alone, since the amount that exceeds your standard deduction is also deductible. Assuming you’re in a 37.5% tax bracket, this could save you $22,500 in taxes for the year of the donation.

2 Methods of lowering income tax, while also lowering estate value

For longer-term strategies, consider Charitable Lead Trusts (CLTs) and Charitable Remainder Trusts (CRTs):

Charitable Lead Trusts

• Place a sum in a trust to pay a charity for up to 20 years.
• The present value of these payments qualifies as a tax deduction.
• At the end of the term, the remainder value can pass to beneficiaries (with possible gift taxes) or back to you or your spouse (tax-free).

Charitable Remainder Trusts

• Pays income to the donor or a beneficiary for a set time, with the remainder going to charity.
• Benefits include:
  • Upfront tax deduction based on the remainder value.
  • Avoiding capital gains tax by transferring appreciated assets to the trust.

Additional methods of charitable giving

Other methods include establishing Private Foundations, Charitable Stock Bailouts, Charitable Gift Annuities, and others. It is always important to consult with an Estate Planning lawyer or professional before implementing a trust or Foundation.

A financial advisor can work with these professionals to help navigate and implement a gifting strategy that meets your needs. To schedule a free consultation, please visit us at f5fp.com.

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