Tax Considerations and Benefits of Charitable Giving

older donor writing a check

by John Shuchart, JCA board member

Financial Management – I don’t know of a subject that frightens us more. This is mostly because we don’t understand it and have had little or no education about it. Frankly, our money is extremely important to us, and we don’t want to lose it. With that in mind, I offer below a couple of strategies to help.

IRAs and Required Minimum Distributions

If you are over age 73 and have an IRA, you will need to make a Required Minimum Distribution (RMD). Remember that all these years, you have paid no income tax on any gain in your IRA you’ve enjoyed. Well, now it is time to “pay the piper.”  The IRS has a table that shows you the portion you will need to withdraw based on your age. This is the amount of distribution you must take this year from your IRA. You can donate that amount to a 501(c)(3) nonprofit and pay no income tax. You don’t have to donate the full amount, but you will pay taxes on the amount you keep. Each year, as you age, the amount changes, so you need to calculate your RMD each year. See the info-graphic below from Fidelity®.

RMD infographic

Donor Advised Funds (DAF)

Many of us have a Donor Advised Fund. That’s a mechanism that allows us to contribute money to a specified fund and receive a full tax-deduction the year we donate. We can donate once, or anytime we want. Each donation is tax-deductible. The money is usually handled by a financial service institution (like Vanguard® or Fidelity®) and invested. Here’s the really good part – you can’t touch the money, but you can donate any amount each year to your favorite charities as long as they are 501(c)(3) nonprofits. So, donate, get a tax deduction, and direct your money to give it to whichever charities you choose. You can start a DAF anytime, so if you want to give to several charities, this is often the easiest way to do it. This brief video explains the process.

donor to DAF to charity illustration

Whether or not you work with an investment advisor, you should be aware of the RMDs and DAFs. Believe it or not, not every advisor or accountant will remind you about these, so you should be a careful steward of your assets, not just DAFs and RMDs!