Hello, I’m Mary Grace Paoletti, Financial Planner and Certified Public Accountant at Howe & Rusling. While the economic climate the past few years has been full of obstacles such as navigating a global pandemic and high levels of inflation in the US, charitable giving has continued to be an important tenet of many individuals’ financial plans. What some might not know, though, is that there are two main methods that can be used to make charitable donations, and each offers its own unique tax benefit. In this video, we’ll explore the differences between utilizing a Donor-Advised Fund and making a qualified charitable distribution.
A Donor-Advised Fund is a charitable investment account that allows donors to take immediate tax deductions for funds contributed in that year. While the tax deduction is immediate, the funds are distributed at the owner’s discretion. Let’s look at an example. If you were to deposit $50,000 into a Donor-Advised Fund, you could then take a $50,000 itemized deduction for that tax year, but choose to have the funds distributed to charities of your choice over the span of several years and in varying amounts. Contributions to a Donor-Advised Fund can include either cash or securities such as stocks, bonds, mutual funds, and ETFs. By choosing to donate one of these types of securities, the asset will continue to grow in value, while allowing you to circumvent paying the capital gains tax on the growth. By utilizing a Donor-Advised Fund and essentially front-loading your charitable contributions, you can benefit from taking an itemized deduction in the year of your donation and then taking a standard deduction the following years. While Donor-Advised Funds offer great flexibility, it is important to note that grants made from a Donor-Advised Fund cannot be used to fulfill a pledge made on your behalf to a charitable organization. In the same way that a beneficiary is named on an investment account, a successor can be named for a Donor-Advised Fund so that in the event the original owner passes away, the successor is able to distribute any funds that remain in the account.
Qualified Charitable Distributions
Now let’s switch gears to Qualified Charitable Distributions, another popular form of charitable giving, and for good reason. The “Qualified” part of the name is an important distinction, because it means that you are allowed to direct your Required Minimum Distributions from your IRAs to charitable giving. What’s the benefit there? You avoid paying the income tax on your RMDs that you would otherwise have to pay. Let’s back up. Remember that once you turn 72, the IRS requires you to take a certain amount out of your Individual Retirement Accounts, or IRAs each year, before December 31. The reason the IRS requires that is so that it can collect some income tax on all of the tax deferred assets out there. So, making a Qualified Charitable Distribution allows you to essentially redirect your RMD to a charity of your choice in order to avoid paying income tax on that distribution. However, one big difference between this method and the Donor-Advised Fund is that you are not allowed to itemize the deduction on Schedule A of your tax return. This makes the QCD route a more advantageous form of giving for individuals that are taking the standard deduction anyway. A couple more important things to keep in mind when making a qualified charitable distribution are that the maximum annual distribution is $100,000 per person, which is less than people’s Required Minimum Distribution in some cases, and if you donate more than your RMD amount it does not reduce the amount of your future RMDs.
This whole topic of charitable giving is something we help our clients navigate and ultimately implement, especially this time of year. If you’re unsure what the best method is for your situation, Howe & Rusling’s Team of CFPs and CPAs can help ensure that your decision will ultimately be most beneficial for your particular circumstances. Thanks for tuning into Street$marts, and we’ll see you next time!