There’s always a year-end interest in giving to charity, and that interest doesn’t have to go away when you retire. Let’s discuss some tax strategies for charitable giving by retirees.
In retirement, there are three barriers that discourage many from making donations. First, when you retire, it may not be easy to make a continuing gift. When you were an employee, charitable giving may have been possible by giving a salary deduction to a charity such as the United Way. The appeal of this approach increased if your employer agreed with your involvement.
A second barrier to giving from retirees is cash flow. When you retire, you don’t receive a continuous paycheck and may live on Social Security, savings, and deductions from 401(k)s, IRAs, and other retirement accounts. It’s natural to ask if you’re jeopardizing your retirement security by giving to charity.
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Finally, there is the issue of taxes. Although donations to qualified charities are deductible, this tax benefit is only available to those who file their taxes – and many retirees do not. If you are tax exempt, this may deduct the amount you can give.
However, we all want to give if we can. Before you stop giving in 2022, consider some of the ways you can make charitable donations and still benefit from a tax perspective. Below are five popular techniques that may be of most interest to you as a retiree.
1. Organize your gift.
Since the Tax Cuts and Jobs Act reformed the income tax in 2017, using the standard deduction for income taxes has been a common choice for Americans, especially if they are retired. While this made tax filing easier, it took away the benefit of the charitable tax deduction.
But there’s still a tax game to be had if you’re willing to factor in your taxes in a few years. A popular technique is to focus charitable contributions on a particular year. Often called “bunching,” the idea is to make a larger charitable donation in a year, so you can add and remove gifts and then come back next year.
For example, consider making a charitable donation next year this year. With larger donations, it can be beneficial for you to file your taxes this year, taking an income tax deduction for your charitable giving. Next year, you can stop donating, but you can still use the standard deduction for your taxes.
2. Use funds offered by the lender.
Doing good deeds usually has two emotions: the desire to help others in need and the joy you feel doing it. If you’re stocking up, you might feel guilty because there’s a gift you want to make this year, but you blew your gift budget last year.
A popular way to control the timing of your giving while still maximizing your tax deduction is to use a donor-advised fund (DAF). This very popular gifting technique allows you to do just that bunch your share for the tax still scattered your gift. With a DAF, you can still make a large gift in 2022 — taking the charitable tax deduction for this year — but decide which charity (or charities) you want to donate to. next year. That way, you combine deductions while controlling which charities get what – and when.
Here’s a great idea for retirees: Set up a DAF with your grown children as gift advisors. Since DAFs allow for matching or controlling charitable giving, you can pass on your values and share the principles of charitable giving with your children. As successor advisors, they can even continue to make gifts on your behalf after your death.
3. Make Qualifying Gifts (QCDs).
If you are at least 70½ years old and want to make a tax-advantaged gift, this technique is, for many, a no-brainer. A QCD is a tax-free gift from your IRA to a qualified charity. The benefit is not a tax deduction, but a way to avoid tax on IRAs and a way to avoid other retirement taxes, such as Medicare’s IRMAA premium.
This technique is most powerful for people who have reached age 72 and must take minimum distributions (RMDs). Instead of being forced to take IRA payments out of your income, you can have the IRA custodian send money directly to your charity.
Transferred gifts count as part of your RMD payment and are never included in your 1040 income. Many retirees don’t want a tax cut, but want to roll over their RMDs and avoid the IRMAA penalty. If you’re philanthropically inclined, QCD might do the trick, and it’s available up to $100,000 per person, per year.
4. Establish an Annual Endowment.
Even if retirees do not have a salary to supplement their income, they may appreciate having an asset that represents a potential source of income. The concern is that there is a tax on appreciation when these assets are converted to income.
For retirees who want to give, a charitable giving year can serve three purposes: to benefit a charity, to save on taxes, and to generate income for retirement.
An annuity is a simple agreement between a donor and a charitable organization in which the donor receives a lifetime income based on the depreciated value of the assets transferred. . When the donor dies, the property is held by the charity.
Many universities and nonprofits offer annual gifts to charities, and the amount they pay depends on your age – your age. Your spouse can be included in the payment, but this will lower the amount paid.
The benefits of annuity giving include charitable giving, partial tax deductions and guaranteed income for retirees. In addition, the portion of all profits that are generated by the taxable share is not taxable.
The main advantage for retirees is the simple transaction, which does not require taxes and legal work.
5. Make a gift for the older children who are charitable.
Here’s another look at tax savings for retirees who want to benefit from charity. The reality of taxes, even for most wealthy retirees, is not a threat to federal estate and gift taxes. With the 2022 lifetime tax exemption and the gift tax at $12.06 million, few retirees need fear the addition of gift taxes when transferring assets to their older children.
Additionally, even if wealthy, retirees are often in a relatively low tax bracket due to less income and higher standard deductions. Their older children, however, can be very anxious. So, why not give the tax benefits of charitable giving to family members in need?
You may have already instilled your values in your grown children, and they may share your desire to give to worthy causes. In such cases, it may make sense for you to give your children a gift, with the hope that they will donate the gift to charity. You don’t pay income tax, but you don’t pay gift tax.
And see it from your child’s perspective. They will receive no income or gift tax from your gift, but when they pass your gift on to charity, they receive a tax deduction. As a family, you’ve given to a good cause and maximized your tax savings.
Be sure to work with a tax advisor if you use this method. For example, if you give an IRA to your children, you will pay taxes immediately. In contrast, if you give a discretionary investment, you will avoid paying taxes on the gains, and your children will also avoid capital gains when they give the assets to a worthy charity.
Your time is running out to get a 2022 tax deduction. Charities need to evaluate, approve and file donations, especially if they involve accounts like DAFs or charitable annual giving. Do good by doing good, but do it quickly.
This article was written by and represents the opinion of our contributing advisors, not the Kiplinger editorial staff. You can see the SEC rate in the chart if you are close to the selected date (opens in a new tab) or with FINRA (opens in a new tab).
