Charitable Gifting During the Holidays

There are a variety of investment options for you to choose from when it comes to your giving to charitable organizations. Here are some common approaches sophisticated investors use for their charitable gifting.

One of the most common strategies for charitable gifting is using a Donor Advised Fund (DAF). DAFs are charitable giving accounts typically offered by financial institutions or charitable organizations. You contribute to the fund and then recommend grants to specific charities over time. DAFs offer immediate tax benefits for contributions and allow you to make grants to multiple charities from a single account.

You can also donate non-cash assets, such as appreciated securities and real estate, to a DAF. One major advantage of doing so is the ability to avoid paying capital gains tax on the appreciation of the assets. When you contribute appreciated securities or other assets, you receive a deduction for the fair market value of the asset at the time of the donation. This means you don't have to pay capital gains tax on the increase in value that asset has experienced over time. Additionally, this deduction can help reduce your income tax liability for the year you donated the assets, potentially putting you in a lower tax bracket.

Another investment vehicle for giving is a Charitable Remainder Trust (CRT). CRTs are irrevocable trusts that provide you (or other beneficiaries) with income for a set period or life. Afterward, the remaining assets go to the designated charity. You receive a charitable deduction for the estimated value of the charitable remainder.

Non-cash assets can be placed in a CRT, but the specific types of assets that can be contributed may depend on the terms of the trust document and the policies of the institution administering the CRT. Also, it's important to note that once you place non-cash assets in a CRT, the decision is typically irrevocable. You cannot change your mind and reclaim the assets. They will be used to generate income for the trust beneficiaries and ultimately benefit the charitable remainder beneficiary.

Charitable Gift Annuities (CGAs) are contracts with a charity where you make a lump-sum donation in exchange for fixed payments for life. Like with a CRT, your contribution is typically irrevocable. A portion of the initial donation is tax-deductible.

In return for the donation, the charitable organization agrees to make regular, fixed payments to you (or you and a second beneficiary, such as a spouse) for life or a set term. The amount of income you receive is determined by an annuity rate, which is set by the charitable organization based on guidelines established by state insurance regulators. The annuity rate is influenced by factors such as your age and prevailing interest rates at the time the CGA is created. Older donors typically receive higher annuity rates. Keep in mind that the income from a CGA is fixed and may not keep pace with inflation over time.

If you're over 70 and a half and have an IRA, you can make tax-free charitable donations directly from it. These donations count toward your required minimum distribution (RMD) and allow you to reduce the amount of taxable income you need to recognize by the RMD.

You can donate up to $100,000 through QCDs. However, it's important to note that these contributions must be made directly to the charitable organization -- you cannot make these contributions through a DAF.

There are other ways for you to give to charitable organizations outside of the investment strategies outlined above, including non-cash contribution options.

If you have substantial wealth to donate, you can establish your own private foundation. This provides more control over the grants made, but it comes with administrative responsibilities and higher costs.

Donating appreciated stocks or other securities to a charity directly can provide tax benefits. You can typically deduct the fair market value of the donated assets, and you avoid paying capital gains tax on the appreciation.

If you own real estate with significant appreciation, donating it directly to a charity can provide tax advantages. You may be able to deduct the fair market value and avoid capital gains tax.

Impact investing is an investment approach that seeks to generate positive social and environmental impact alongside financial returns. Unlike traditional investment strategies, where the primary focus is on financial gains, impact investing is driven by the desire to create positive change.

Impact investing has gained momentum in recent years as investors increasingly recognize the potential to make a difference while seeking financial returns. This type of investing can take various forms, including:

• investing in socially responsible mutual funds and exchange-traded funds (ETFs),
• supporting social enterprises and startups that have a clear social or environmental mission,
• investing in green bonds and sustainable infrastructure projects,
• providing capital to microfinance institutions that empower underserved communities, or
• backing affordable housing initiatives and community development projects.

Charitable gifting can offer several tax benefits to individuals and organizations. The IRS has specific requirements for what qualifies as a deductible charitable donation, and the amount you can deduct may be subject to limits based on your adjusted gross income.

When you make a charitable donation to a qualified tax-exempt organization, you may be eligible to deduct the donated amount from your taxable income, which can reduce your overall income tax liability. A tax professional can help you itemize your deductions on your tax return and complete Form 1040.

Keep in mind that there are limits on the amount you can deduct for charitable donations. These limits are based on your adjusted gross income (AGI) and the type of organization you are donating to. The standard deduction for 2023 is $13,850 for single filers and $27,700 for joint filers. If you're over 65, you may be eligible for a higher standard deduction.

If you choose to itemize your deductions rather than take the standard deduction, the IRS generally allows you to deduct cash contributions to qualified charitable organizations up to a maximum of 60% of your AGI.

Donating appreciated assets such as stocks, real estate, or other investments can help you avoid capital gains tax on the appreciation. You can typically deduct the fair market value of the donated assets on your income tax return.

Charitable gifts can reduce the taxable value of your estate, potentially lowering your estate tax liability. Bequests and other planned giving strategies can have a significant impact on estate tax planning.

Generally, gifts made to qualified charitable organizations are not subject to gift tax. This means you can give sizable donations without triggering gift tax liabilities.

Some states, including Illinois, offer additional tax incentives for charitable giving.

Along with making charitable donations, many people gift money to individuals around the holidays. Personal or private gifts also come with many tax advantages.

The annual gift tax exclusion allows you to give a certain amount of money to an individual each year without triggering gift tax. The annual gift tax exclusion for 2023 is $17,000 per recipient, and married couples can jointly gift up to $34,000 per recipient without tax consequences. In 2024, the annual gift tax exclusion will be $18,000 per recipient.

In addition to the annual gift tax exclusion, there is a lifetime gift tax exemption that allows you to make larger gifts without immediately paying gift tax. However, this exemption is subject to federal estate tax limits and can change over time. In 2023, the federal lifetime gift and estate tax exemption is $12.92 million, and in 2024 this will increase to $13.61 million.

Payments made directly to educational institutions for someone's tuition or medical expenses directly to healthcare providers on behalf of an individual are not subject to gift tax, regardless of the amount.

If you lend money to an individual with the expectation that it will be repaid, it is considered a loan and not a gift. However, if you don't expect repayment or the loan terms are exceptionally favorable, the IRS may view it as a gift for tax purposes.

Some states have their own gift tax laws with different exemption amounts and rules. Illinois does not have any rules or regulations regarding personal gifts -- it follows the same guidelines as the IRS.

If you exceed the annual gift tax exclusion, you must report the excess gift on the Gift Tax Return (Form 709). However, you generally won't owe gift tax unless you've used up your lifetime exemption.

Charitable gifting is a great way to spread joy during the holiday season, and the financial benefits that come with it can make it even more worthwhile for sophisticated investors. If you'd like to learn more about the investment options discussed in this article, you can reach out to your advisor. Or, if you're interested in working with Chicago Partners to plan your charitable gifting strategy for 2023 or 2024, you can send us a message here.