Navigating Philanthropy: A Guide to Charitable Giving Options

When it comes to philanthropic giving, understanding the different methods and their implications can help you make informed decisions that align with your financial goals and charitable intentions. Below, we’ll provide a brief overview of several popular options available to you, each with unique benefits and considerations.

Donor-Advised Funds (DAFs): A charitable savings account that allows you to donate without choosing a charity right away. The money grows tax-free in the account until you, your family, or designated heirs can recommend grants to public charities. All contributions to the account are immediately tax deductible and as such are legally controlled by the organization that offers it. You may make grant recommendations to a variety of local or national non-profit organizations at any time throughout the life of your account. Contributions to a DAF are irrevocable. The deduction for contributing to a donor-advised fund can be up to 60 percent of adjusted gross income for cash and 30 percent of adjusted gross income for long-term publicly traded appreciated securities.

Private Foundations: An independent charitable entity organized under Sec. 501(c)(3). The deduction for contributing to a private foundation can be up to 30 percent of adjusted gross income for cash and 20 percent of adjusted gross income for long-term publicly traded appreciated securities (lower than a DAF). Although private foundations are exempt from federal income tax, their investment income is subject to an excise tax of 1.39 percent. You will need to consult a CPA or lawyer to set up the foundation, draft and file its articles of incorporation, mission statement, and other documents, and obtain the foundation’s tax identification number from the IRS. One of the benefits is expenses related to the operation of the Foundation can be expenses. When the mission and longevity are large enough, this can be a more attractive way to execute a philanthropy goal.

Charitable Remainder Trusts (CRTs): A charitable remainder trust (CRT) is a tax-exempt, irrevocable trust that allows a donor to donate assets to charity while still receiving income for themselves or their beneficiaries. The trust can pay out income for a set number of years or for life, and the payout percentage must be at least 5%. The remaining assets in the trust are then given to charities at the end of the income stream. The benefit here is that you get the use of the assets while alive and a streamlined way to gift the charities at the end of the trust.

Charitable Gift Annuities (CGAs): A charitable gift annuity (CGA) is a contract between a donor and a charity where the donor gives a large gift to the charity in exchange for a fixed income stream for life. The donor can use cash, securities, or other assets to make the gift. The charity then sets aside part of the gift in an account to be invested, while using the rest immediately for its charitable purposes. The charity is legally obligated to provide the donor and up to one other beneficiary with regular income payments until the last beneficiary dies.

Qualified Charitable Distributions (QCDs): Allows you to send some or all of your required minimum distribution (RMD) to a charity and avoid income taxation. Your financial institution issues the check directly to the charity.

Double Tax Benefit: When coming directly from your IRA you are taking advantages on two fronts.
- The first is that you are deferring taxes and lowering your taxable income in the year you are contributing to your IRA.
- Secondly, as you opt to use QCDs for your RMD these are not taxed upon distribution like a normal distribution would be. Therefore, saving in taxes once again.

Donate stock: Donating stock directly to a charity can potentially eliminate capital gains tax.

Each of these options comes with its own set of benefits and requirements, so it’s important to consider which aligns best with your financial situation and philanthropic goals. Consulting with a financial advisor or tax professional can also help you navigate the complexities and maximize the impact of your charitable giving.

Green Ridge Wealth Planning, LLC is a registered investment adviser. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment / tax advice. The investment / tax strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment / tax strategy for his or her own particular situation before making any investment decision. You are responsible for consulting your own investment and/or tax advisor as to the consequences associated with any investment.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of AUTHOR, may differ from the views or opinions expressed by other areas of Green Ridge Wealth Planning, LLC, and are only for general informational purposes as of the date indicated.

Optimizing Asset Location for Tax Efficiency

When investing, it's common to think about diversifying within both your overall portfolio and each individual account. While this approach can work, we believe in going a step further and paying close attention to the details. Our CEO, Bobby Mascia, often says, "Diversification is lazy asset management." What he means is that you shouldn't diversify just for the sake of it. Instead, be strategic and invest in sectors or assets that are performing well. When market conditions change, you should adjust your investments accordingly. Additionally, consider whether your accounts are optimized to minimize tax impact. Let's dive deeper into what this means.

Asset Types

Equities (Stocks or ETFs): If held for more than a year, these are taxed at the long-term capital gains rate when sold which is typically lower than your ordinary income tax rate. (“Ordinary income” is the income you have earned and will be taxed at in your given tax bracket). If held for less than a year, they are taxed at the typically higher short-term capital gains rate.
Fixed Income (Bonds): The interest earned is taxed at your ordinary income tax rate.

Account Types

Joint/Individual Accounts: These are taxable accounts, meaning any interest earned or gains realized from selling stocks are taxed in the year they occur.
IRA: This is a tax-deferred account, meaning there are no tax implications for interest earned or positions sold until you withdraw from the account. Withdrawals are taxed at your ordinary income rate at the time of withdrawal.
Roth IRA: This is considered a "tax-free" account because contributions are made with money that has already been taxed. Any gains realized or interest earned, as well as withdrawals, are not taxed.

Asset Location Tax Optimization Examples

Let's use simple examples to illustrate the point. Both portfolios below have a value of $2 million, with a standard 60/40 allocation (60% equities, 40% fixed income).

Example 1: In this portfolio, the IRA and the Joint account are allocated the same amount to equities and fixed income (60/40). The joint account produces $26k of annual income, which is taxed at your ordinary income tax rate.

Say you are in the 32% tax bracket, this would add another $8,320 to your tax bill for the year

Example 2: The joint account has a higher percentage of equities, and the IRA has a higher percentage of fixed income. The overall allocation remains the same (60/40). Here, the joint account produces only $16,000 of annual income.

Once again, say you are in the 32% tax bracket. Here, you would only add $5,120 to your tax bill for the year, thereby saving a little over $3,000 compared to the first example. This may not seem like much; however, as complexities increase and your income increases, the potential savings also increase.

By thoughtfully considering the taxability of the assets in your portfolio, you can lower your tax burden not just in a single year but over time. In this example, you reduce your taxable income by $10,000 through optimizing the types of accounts and the taxability of the assets. This is done without changing the overall risk or return potential of the entire portfolio.

Key Assumptions

Assuming a 32% tax bracket
Equities earn a 1% dividend.
Fixed income earns 5% interest.

This can get more complex, especially as you dig deeper to learn more about their appreciation or taxable income, but even a basic understanding can be very beneficial. If you have any questions or would like to discuss in more detail, feel free to reach out to us.

The foregoing mention of taxable income is in the appreciation of the portfolio and is not income withdrawn; taxation on that would be different. You are responsible for consulting your own tax advisor as to the tax consequences associated with any investment or option. The tax rules governing options are complex, change frequently and depend on the individual taxpayer's situation. These are all things to confirm with your tax advisor and should not be deemed as advice.

2024 Updated Tax Limitations: Top 5 Things to Know

Every year the IRS changes tax limitations to account for inflation and other economic factors. These adjustments ensure that tax-related figures like income brackets, deduction amounts, and contribution limits remain up to date and reflective of current economic environments. The top five changes for 2024 that you should be aware of surround Traditional IRAs, phase outs, Roth IRAs, company sponsored plans, and gift tax benefits.

Traditional and Roth IRA Annual Contribution Limits

With these recent adjustments by the IRS the 2024 annual contribution limit was increased by $500 to $7,000 for both Traditional and Roth IRAs, allowing individuals an enhanced opportunity to maximize their retirement savings. Last year annual contribution limits for both Traditional and Roth IRAs maxed out at $6,500 with an additional contribution of $1,000 allowed for those over the age of fifty qualifying for catch up programs.

Phase Outs

Individuals contributing to Traditional IRAs with income of $77,000 or below qualify for full deductions in 2024, and partial deductions up to $87,000. Individuals making more than $87,000 do not qualify for Traditional IRA contributions, a $5,000 increase from last year’s phase out limit of $83,000. Married individuals filing jointly with combined income below $230,000 qualify for full deduction this year while those with combined income above $240,000 do not qualify for Traditional IRA contributions, a $12,000 increase from last year.

Individuals contributing to Roth IRAs with income of $146,000 or below qualify for full deductions in 2024, and partial deductions up to $161,000. Individuals making more than $161,000 do not qualify for Roth IRA contributions, an $8,000 increase from last year’s phase out limit of $153,000. Married individuals filing jointly who contribute to Roth IRAs fall under the same phase out limitations as Traditional IRA contributors in 2024.

Company and Employer Sponsored Plans

The annual limit for tax-deferred contributions into qualified retirement plans, 401(k)s and 403(b)s, rose $500 to $23,000 this year. Maximum annual additions to SEP IRAs rose to $69,000 in 2024, up $3,000 from last year. The new maximum compensation that will be considered for SEP IRA individuals is now $345,000. Individuals over fifty years old who qualify for catch up programs are still entitled to a $3,500 additional contribution.

Gift and Estate Taxes

Annual gift exclusion tax exemptions continue to rise this year as well. A $1,000 increase from last year’s $17,000 limit now allows individuals to make charitable contributions up to $18,000 tax free annually. It is important to remember that substantiation is required for gifting, so remember to keep track of your un-taxable expenses!

If you have any questions or are interested in learning more about the 2024 tax limitation changes, please reach out to our team or check out the 2024 Tax Reference Guide here.