There is still time to do well by doing good this year, and there are still tax benefits available to retirees who make charitable contributions. Act quickly, though!
There is usually a year-end interest in donating to charity; this motivation does not always disappear upon retirement. Let’s discuss some tax-intelligent ways for charitable contributions by retirees.
Three obstacles dissuade many retirees from giving presents. First, it may be difficult to make recurring gifts after leaving employment. As an employee, you may have been allowed to make philanthropic contributions through payroll deductions to organizations like United Way. If your company matched your contributions, the appeal of this strategy would be reinforced.
Cash flow is a second obstacle to donations by retirees. You will likely rely on Social Security, savings, and distributions from your 401(k), IRA, and other retirement funds upon retirement, as you no longer get a regular income. It is reasonable to wonder whether contributing to charity jeopardizes your retirement security.
Lastly, there is the matter of taxes. Donations to qualified organizations are tax deductible, but this benefit applies only to taxpayers who itemize, and many retirees do not itemize. If you do not benefit tax-wise, this may reduce the amount you may donate.
Nonetheless, we all desire to offer if we can. Before you give up on philanthropy in 2022, consider some ways you might still profit from your gifts from a tax perspective. As a retiree, the following five strategies may particularly appeal to you.
Group Your Contributions.
Since the Tax Cuts and Jobs Act reformed income taxes in 2017, the standard deduction has become the default option for Americans, particularly those who are retired. While this has simplified tax filing, it has eliminated the benefit of the charitable income tax deduction.
However, a tax strategy is still accessible if you are ready to itemize in certain years. Concentrating philanthropic donations in specific years has been a common practice. Commonly referred to as “bunching,” the concept is to make greater charitable contributions in one year so that you may itemize and deduct the amount the following year.
Consider making this year’s charity gifts instead of next year’s. With the bigger gift, you may be able to itemize your taxes and receive a tax deduction for your charitable contributions this year. Next year, you can reduce your charitable contributions, but you can still claim the standard tax deduction.
Employ Donor Advised Funds.
Giving to charity is often accompanied by two emotions: the desire to aid those in need and the happiness that comes from doing so. If you are bunching your donations, you may feel bad because you want to make a charity donation this year but ran out of money last year.
A donor-advised fund (DAF) is a popular approach to regulate the timing of your donations while maximizing tax savings. This widely used method of giving allows you to group your payments for tax purposes while spreading them out. With a DAF, you can still make a substantial gift in 2022 and earn a tax credit for this year, but you can choose which charity (or organizations) will receive the monies in 2024. You may bundle your deduction while retaining control over which charity receives what and when.
Consider establishing the DAF with adult children serving as advisors. Since DAFs provide shared or supervised charitable contributions, you may impart your ideals and teach your children about charitable giving. As successor advisers, they can continue to make philanthropic contributions in your name even after your death.
Make Eligible Charitable Contributions (QCDs).
If you are at least 70.5 years old and wish to make tax-advantaged contributions, this strategy is, for many, a no-brainer. A QCD is a tax-deductible contribution from an IRA to a qualifying charity. The benefit is not a tax deduction but rather the ability to avoid taxation of an IRA and other retiree taxes, such as the Medicare IRMAA premium.
This strategy is especially effective for people over 72 who must accept mandatory minimum distributions (RMDs). Instead of being required to include IRA distributions in your adjusted gross income, you can have the IRA custodian transfer monies directly to a charity.
The transferred gift is considered part of your RMD payment and is never included in your 1040 income. Many retirees do not want tax deductions but wish to avoid RMDs and the IRMAA penalty. A QCD may be for you if you have a charitable disposition, and it’s available for up to $100,000 per individual every year.
Establish a Charitable Donation Annuity.
Even though retirees often do not have salaries to boost their income, they may have valued assets that might serve as a source of income. Taxes must be paid on the appreciation of these assets when they are turned into income.
For retirees who wish to make a charitable contribution, charitable gift annuities can accomplish three goals: assist the organization, reduce taxes, and provide retirement income.
A charitable gift annuity is a very straightforward arrangement between a donor and a charity whereby the donor receives a lifetime income based on the discounted value of donated assets. The charity retains the assets upon the demise of the donor.
Numerous colleges and non-profit organizations provide charity donation annuities with age-dependent payouts. The amount will be reduced if your spouse is included in the payments.
A charitable gift annuity offers the retiree a charity contribution, a partial income tax credit, and a guaranteed lifelong income stream. Additionally, the portion of any capital gain due to the tax-deductible element is not subject to taxation.
A significant advantage for retirees is that this transaction requires no time-consuming tax or legal procedures.
Make Gifts to Adult Children Who Are Generous.
Here is a fresh perspective on tax savings for retirees who wish to donate to charity. Even for most wealthy retirees, the federal estate and gift tax pose little danger. With the lifetime estate and gift tax exemption of $12.06 million in 2022, transferring assets to adult children by retirees is unlikely to attract a gift tax.
In addition, even wealthy retirees are frequently in very low tax bands due to a lack of employment and a bigger standard deduction. However, their adult offspring may be at a high tax rate. Therefore, why not provide the tax benefits of charitable giving to family members in need?
You may have ingrained your ideals in your adult children, and they may share your desire to donate to charitable organizations. In such cases, it may be prudent to give your children a present with the intention that they would contribute it to a charity. You do not obtain a tax deduction, nor do you pay a gift tax.
And consider it from your children’s point of view. They will not suffer income or gift taxes on your donation, but they will receive an income tax deduction when they donate it to charity. You have donated to a worthy charity and maximized your tax savings as a family.
If you utilize this method, you should consult with a tax professional. For instance, if you give your child an IRA, you will suffer immediate income taxation. In contrast, if you donate an appreciated investment to a qualified charity, neither you nor your kid will be subject to capital gains tax on the appreciation.