Jump Start Your Year-End Financial Planning:

I can’t believe I’m saying this, but we’re getting closer to the end of the year! Time truly does fly…

For many clients and financial advisors, year-end planning implies that you need to wait until the end of the year to check various strategies off your list.

Here’s a fresh idea for you. For most people, there’s very little reason to wait until the end of the year (e.g., December) to do most of it.  In fact, there are situations where waiting until the last moment could potentially put you in trouble. Plus, wouldn’t it be nice to finalize all your planning tasks by mid-November, or even sooner, and enjoy the holiday season with peace of mind?

Over the next several weeks, we’ll dive into each of the planning ideas to keep it simple and digestible for you. In this newsletter, we’ll focus on charitable donations.

When it comes to charitable gifting, there are significant financial planning and tax benefits for those who are proactive and understand how to take advantage of IRS rules.

Before we get started, this newsletter is not intended to provide any tax, financial, or investment advice. The strategies and examples in this letter are for informational purposes only. The outcomes in your specific situation may be significantly different. We strongly suggest that you work with a qualified professional if you decide to implement any of the ideas in this newsletter.

Are you thinking about making many small gifts to different charities?

Let’s start with the basics. If you simply want to support a few or several of your favorite charities, there’s no reason to overthink it.

Donate cash, keep the receipts, and provide relevant information to your tax preparer at tax time. That’s all there is for relatively small donations.

What if you want to make significant charitable gifts?

You have multiple options and you will certainly need some time to properly analyze each of them (this is why it makes sense to think about all of this now).

Donating large amounts of cash is usually not the best choice tax-wise as it rarely maximizes the tax benefits. (Also, if you’re sitting on large amounts of cash in your bank account, you may need to revisit your overall financial plan!)

If your stocks or funds in brokerage accounts have significantly appreciated in value, which is likely given the market performance over the past few years, donating appreciated stock can be a much better choice for you.

If you purchased a stock for $100/share and it appreciated to $150/share, you may be able to claim a deduction for the entire amount that you gift, meaning $150/share in this example.

By doing this, you not only accomplish your charitable intent but also reduce capital gains taxes you would incur if you sold this stock (e.g., $50/share). 

A fair word of warning! You need to be itemizing your deductions to actually benefit from donating appreciated stock. You won’t fully benefit from this strategy if you simply claim the standard deduction ($14,600 for single filers and $29,200 for joint filers in 2024). 

What if you want to donate a large percentage of your assets but aren’t sure which charities should receive the funds yet?

This situation is common for those who want to proactively reduce their taxable estate during their lifetime.

After all, if you want to gift a quarter of your estate to charities, wouldn’t you want to see the fruits of your contributions during your lifetime?

In this situation, one of the better solutions is to create a Donor-Advised Fund (DAF). DAFs are relatively easy to set up and administer. We frequently create these types of accounts for our clients.

Here is how it works (and this is a very brief description).

You transfer a large amount of appreciated stock to your DAF, let’s say $100,000. If you structure the transfer properly, you will be able to deduct the entire amount on your tax return in the year of contribution.

This can easily result in $20,000 to $30,000 in tax savings in this example.

Once the funds are in the DAF, you can donate as much as possible and to as many charitable organizations as you would like over any period that you prefer.

As an example, you can donate $10,000/year for 10 years from the DAF to different charities. Any unused funds will also continue to appreciate in value inside the DAF.

Are you 73 or older and need to take your required minimum distribution (RMD)?

If this is the case and you also want to support your favorite charities, donating a portion of your RMD can be one of the most tax-advantageous options for you.

This strategy is called the Qualified Charitable Distribution (QCD). 

Any portion of your RMD that you donate directly to charities results in a dollar-for-dollar reduction in your taxable income. In 2024, you can donate up to $105,000 of your RMD.

Assume you need to take an $80,000 RMD this year. If you decide to donate $20,000 of it to different charities, only $60,000 will be taxable to you.

For many people in this example, the tax savings will be close to $5,000 or even higher (i.e., 25% or more of the donated amount). 

Some financial institutions will also mail the QCD directly to the charities of your choice, so you won’t even need to deal with mailing checks, which can be rather time-consuming if you want to support many organizations.

You still want to make sure that you receive the gift confirmation from each of the charities you support.

In short, there are few reasons why you would want to wait until the end of the year to support your favorite charities. With a proper and carefully analyzed approach, you can also save yourself $1,000s or even $10,000s in taxes as you support important causes!