Table of Contents
- Aligning Philanthropic Goals with Personal Values
- Choosing Effective Charities for Qualified Charitable Distributions
- Navigating Tax Effective Giving Strategies
- Exploring Other Ways to Give
- Understanding Changes to the Giving Landscape
- Case Study: A Model of Successful Charitable Giving
- Establishing Your Philanthropic Legacy with Strategic Contributions
- Frequently Asked Questions
Giving back to your community, country and planet is an important part of using your finances well. Monetary donations not only offer support to charities and nonprofits, but help to advance causes that matter to you. The first step to charitable giving is engaging in a self-reflective journey on why you want to give. Tax benefits are a bonus, but the root of your generosity should always be your commitment to making a positive impact.
Kuhn Advisors, Inc. is a comprehensive wealth management firm located in Durham. With deep roots in the Bull City and greater Triangle, our team is knowledgeable on a variety of local charities. President and Founder Mark Kuhn gives back to his Durham community, and our team would love to share our understanding of the Triangle’s nonprofit landscape with you. Keep reading to learn more about maximizing the impact and tax efficiency of your charitable giving.
Aligning Philanthropic Goals with Personal Values
Your first step toward meaningful charitable giving is self evaluation. Is there a specific social cause that you would like to support? Do you intend to invest in your neighborhood, or a larger region? Taking time to identify the why behind your giving allows you to set philanthropic goals that are thoughtful and effective. Here are some helpful questions to consider when deciding where to give.
- Why have you decided to start donating financially? Is there a cause, group, individual or mission that inspired you?
- Are you passionate about giving back to your local community, or would you like to invest in a national or international cause?
- Do you have an interest in small, newer nonprofits or large, long-standing organizations?
- What social causes most interest you? Some common causes addressed by nonprofits include child welfare, housing security, hunger, access to health care, environmental issues, etc.
- Would you like to get to know the individuals who work for the nonprofit you select? Would you like the opportunity to visit with the staff or tour the facility?
After establishing your philanthropic goals, you are equipped with the knowledge necessary to research charities that will align with them.
Choosing Effective Charities for Qualified Charitable Distributions
While a quick Google search may offer you a list of nonprofits, both locally and nationally, that match your philanthropic goals, evaluating an organization before committing to give helps ensure that your money will be used as intended. Financially, the first resource to check is a Form 990 or 990-N. Nonprofits with $50k or more in annual gross receipts are required to file a 990 with the IRS, while nonprofits with less than $50k file a 990-N. These documents make expenditure, revenue and income data from tax-exempt organizations accessible, increasing transparency.
Further, review your selected nonprofit’s mission and initiatives before giving. Make sure their mission statement is clear and easy to understand. Then, ensure their actions align with their mission. If none of the nonprofit’s promoted initiatives are connected to their mission, consider giving somewhere else.
Finally, after finding a charity that both aligns with your philanthropic goals and is transparent about their work, consider your ability to give. At Kuhn Advisors, we understand that decision-making never exists in a vacuum. Effective giving is more than deciding where to give, it’s also knowing how much to give. Your donation amount is affected by your income, life stage, age and current priorities.
The Kuhn Advisors team would love to help you navigate through your circumstances and giving goals to establish your tailored solution. Keep reading to learn more or schedule a 15-minute call to get started with the Kuhn Advisors team today.
Navigating Tax Effective Giving Strategies
Tax planning is an essential part of maximizing the benefits of charitable giving. Both individuals and businesses can leverage various strategies to reduce their tax liability while supporting their favorite charities. Here are some effective tax planning strategies for charitable giving:
Itemize Deductions
To benefit from charitable donations from a tax perspective, you need to itemize deductions on your tax return. This involves listing all deductible expenses you’ve incurred throughout the year, including those for charitable contributions. It’s important to compare whether itemizing or taking the standard deduction will provide more tax savings, especially after recent changes in tax law that increased the standard deduction amount. Consulting with your tax preparer is highly recommended.
Bundle Contributions
“Bunching” or bundling contributions means combining several years’ worth of donations into one tax year. This strategy can help you surpass the standard deduction threshold, allowing you to itemize deductions. After a high-donation year, you might take the standard deduction in subsequent years when your deductible expenses are lower.
Donate Appreciated Assets
Donating stocks or other assets that have appreciated in value can be more tax-efficient than giving cash. If you’ve held the asset for more than a year, you can deduct the current market value and avoid paying capital gains tax on the appreciation. This method not only lowers your tax liability but also allows you to contribute a more significant amount to the charity.
Use a Donor-Advised Fund (DAF)
A Donor-Advised Fund is a philanthropic vehicle that allows you to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund over time. You can contribute cash, stocks, or other assets to a DAF and receive a tax deduction in the year of your contribution, even if you decide to distribute the funds to charities over several years.
Make IRA Qualified Charitable Distribution (QCD)
For those aged 70½ or older, the IRA charitable rollover (or qualified charitable distribution) is a tax-savvy way to donate. You can transfer up to $105,000 per year directly from your IRA to a qualified charity. This amount counts toward your required minimum distribution (RMD) but doesn’t increase your adjusted gross income, which can help reduce taxes on Social Security benefits and lower Medicare premiums. Certain rules must be followed to ensure the best tax treatment of a QCD so consulting with a financial or tax professional is highly recommended.
Consider Charitable Trusts
Setting up a charitable remainder trust (CRT) or charitable lead trust (CLT) can be beneficial for those with larger estates. A CRT allows you to receive income for a set period, after which the remainder goes to your chosen charity. Conversely, a CLT pays a stream of income to a charity for a period, with the remaining assets eventually returning to you or your heirs. These trusts offer tax benefits, including deductions and potential savings on estate taxes.
Exploring Other Ways to Give
After reviewing your circumstances, you may determine that giving financially is not a wise decision for you right now, and that’s fine. There are plenty of ways to support charities beyond financial contributions. For some inspiration, read up on some of the most popular ideas below.
- Volunteer Your Time: Using your time to volunteer at your selected charity is an excellent way to give back. Nonprofits are always looking for hardworking and empathetic individuals to help out.
- Ask for Donations as Gifts: If someone plans to give you a gift for a holiday or significant life milestone, ask them to donate funds to your selected charity instead.
- Research Organizations: Learn about current events pertaining to the cause you intend to support and make an effort to buy from ethically sourced companies.
- Donate Items: Furniture, clothing, unused household supplies; all of these items can be donated to nonprofits that need them. Find out whether your selected charity accepts this type of donation.
There are dozens of ways to give back to your community, and our advisors are here to discuss the options above and additional ideas with you and your family.
Understanding Changes to the Giving Landscape
Significant changes to estate laws are expected in 2025 due to the scheduled expiration of the Tax Cuts and Jobs Act (TCJA) provisions. Here’s a summary of the key changes and what they mean:
Estate and Gift Tax Exemptions: The current federal estate and gift tax exemption amount is approximately $12.92 million per individual ($25.84 million for married couples). However, these exemptions are set to expire on December 31, 2025. After this date, the exemption amounts will revert to roughly $7 million per individual ($14 million for married couples), significantly lowering the threshold for taxable estates.
Increased Tax Rates: Along with the reduced exemptions, the estate tax rate will increase. Currently, the estate tax rate is 40%, but it is expected to rise to 45% starting in 2026.
Lifetime Gifting Opportunities: The next couple of years present an opportunity to maximize lifetime gifts. Individuals can take advantage of the current higher exemption limits to transfer wealth without incurring gift taxes. This strategy is particularly beneficial for high-net-worth individuals, as the anti-clawback rule ensures that gifts made during the higher exemption period are not subject to additional estate taxes if the donor dies after the exemption decreases.
Advanced Estate Planning Techniques: Utilizing tools such as Irrevocable Life Insurance Trusts (ILITs), Dynasty Trusts, and Spousal Lifetime Access Trusts (SLATs) can help in managing estate tax liabilities. These trusts allow for the transfer of assets out of the taxable estate, potentially saving significant amounts in future taxes.
To best navigate these changes, it is advisable to consult with a financial or estate planning advisor who can help tailor strategies to individual circumstances and ensure that you maximize the current tax benefits before they expire.
Case Study: A Model of Successful Charitable Giving
The following case study illustrates how we recently helped a client create a vision for her philanthropic giving while integrating smart investment and tax planning considerations.
Erin, a freshly minted retiree, had always dreamed of creating a charitable foundation with a portion of her $2mm portfolio. She had a vast array of philanthropic interests, ranging from local foodbanks to international humanitarian organizations. She also valued maintaining a high degree of flexibility over the timing, amounts, and recipients of her donations.
In reviewing her financial picture with Kuhn Advisors, it was noted that her portfolio held a large portion of Amazon.com stock, which had grown over the years to represent nearly 15% of her total wealth. While Amazon.com is a blue-chip company and has been a successful investment, Kuhn Advisors never recommends having a client’s financial future dependent on a single asset. Unfortunately, selling all or a portion of this stock would have subjected Erin to a significant tax bill. In looking to reduce her exposure to the stock and fulfill her charitable intentions simultaneously, Erin’s Kuhn Advisors wealth advisor worked with her to open a donor-advised fund (DAF) and fund it with a portion of her Amazon.com shares. By using this charitable giving vehicle, Erin was able to improve her financial picture in the following ways:
- Make an impact while maintaining flexibility
Opening a DAF with stock allowed Erin to create a stockpile of cash that could be granted to thousands of eligible charitable organizations at any time in the future, depending on how her philanthropic interests develop over time.
- Increase portfolio diversification and reduce risk
Removing a portion of the Amazon.com stock from her portfolio reduced the potential uncertainty that a single stock could have on her financial future.
- Decrease her tax bill
Once the Amazon.com stock was deposited into the DAF, it was sold to generate cash for future gifting and no taxes were owed on the built in gain.
Erin was also able to take a charitable deduction on her current year tax return for the value of the Amazon.com shares she donated to the DAF, even though she planned to make grants to charitable organizations over the next 5 years.
- Avoid administrative burdens and costs of a private foundation
A DAF allowed Erin to maintain a large degree of freedom to support her favorite causes without the time, hassle, and expenses associated with setting up and running a private foundation.
If you are interested in discussing how best to align your philanthropic, tax, and investment goals, please schedule a 15-minute call with Principal & Senior Wealth Advisor Scott Ranby from the Kuhn Advisors team today.
Establishing Your Philanthropic Legacy with Strategic Contributions
A passion for giving combined with tax effective, strategic philanthropy sets not only your donations but your personal finances up for success. Remember to find a cause that you care about, find a charity that uses their funds honestly, select a tax effective giving strategy and remain aware of the upcoming changes to charitable giving.
Our team is values driven, and we strive to assist clients who are driven in the same way. For clients looking to establish their philanthropic legacy with our help, we offer the below guidance and pride ourselves in helping you see the big picture and tailoring solutions to you.
- Make a positive difference for you and the world: We can build a diversified, socially responsible portfolio that doesn’t sacrifice the ability to grow your nest egg, potentially positioning you to achieve both your financial and social goals.
- Build Your Team: Maximizing your philanthropic activities may involve obtaining tax and legal counsel. We work with a network of outside professionals to bring you seamless solutions.
- Family Education: We are happy to consult with your adult children on their financial lives, ensuring they make the most of their resources and time horizon, from starting off their careers to raising a family and planning for retirement.
For personalized guidance on all things charitable giving, schedule a 15-minute call with Principal & Senior Wealth Advisor Scott Ranby from the Kuhn Advisors team today.
Frequently Asked Questions
- How can I verify if a charity is legitimate? You can verify the legitimacy of a charity by checking if it is registered with the IRS as a tax-exempt organization. Websites like GuideStar, Charity Navigator, or the Better Business Bureau’s Wise Giving Alliance also provide information about the credibility and operations of charities.
- Are all donations tax-deductible? Not all donations are tax-deductible. Contributions must be made to qualified tax-exempt organizations under IRS Section 501(c)(3) to be tax-deductible. Donations to individual people, political organizations or candidates are not tax-deductible.
- How much of my donation goes directly to the cause? This varies by organization. You can typically find information about a charity’s fund allocation on their website, or third-party review sites like Charity Navigator. This ratio is important as it indicates the percentage of funds that go directly towards the cause versus administrative expenses.
- How can I include charitable giving in my estate planning? You can include charitable strategies in your estate planning by setting up bequests in a will, designating charities as beneficiaries in retirement accounts and life insurance policies, or using tools like charitable remainder trusts or charitable lead trusts.
Disclosures:
The opinions expressed are those of Kuhn Advisors, Inc. 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. Forward-looking statements cannot be guaranteed. This material should not be construed as tax advice. You should always consult with your tax professional regarding specific tax questions and obligations. Kuhn Advisors, Inc. utilizes its best efforts that content provided is compiled or derived from sources believed to be reliable and accurate but makes no representation thereof and accepts no liability for any loss arising from the use or reliance herein.
Kuhn Advisors, Inc. is a registered investment adviser with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Kuhn Advisors, Inc., including its advisory services and fee schedule, can be found in its Form ADV Part 2 and/or Form CRS, which is available upon request. KA-24-07