charitable giving

Tax-Friendly Charitable Giving Strategies for Retirees

As the leaves start to turn, you can turn your attention to autumn-themed ways to give back through volunteering or donating. Charitable giving can help those in need and give retirees purpose and fulfillment. However, tax considerations are crucial in charitable donations, especially for retirees living on fixed incomes. 

In this blog, we will explore tax-friendly charitable giving strategies that retirees can utilize to help maximize their contributions while helping to minimize their tax burdens. Here’s what you need to know.

Bunch Your Donations

An effective strategy for retirees to help improve how they donate to charities is using the “bunching” donations strategy. Bunching donations involves combining several years’ worth into a single year. This idea became well-known in 2017 because of the Tax Cuts and Jobs Act. Since this law came into effect, the regular deduction for 2023 is $13,850 for individuals and $27,700 for those filing taxes together.

Retirees can list their deductions for that specific year, which might exceed the standard deduction limit. In the following years, they can choose the standard deduction. This strategy helps retirees to have a more significant influence through their charitable donations while also helping to gain tax deductions.

However, donation bunching is a multi-year plan that demands commitment and effort. There might be a better approach if you face substantial financial uncertainty or other obstacles hindering your ability to follow through. If you’re concerned that donation bunching could disrupt your support for the charitable causes you value, consider how to avoid or mitigate this before committing. Your Fiduciary advisor should help guide your best strategy when bunching donations. 

Use Donor-Advised Funds

Donor-advised funds (DAFs) are dubbed the gift that keeps on giving. It’s a popular way to give to charity, especially for retirees. With a DAF, you can put a lump sum into a charitable account and get an instant tax break. Later, you can choose which charities to give the money to, spreading it over time.

DAFs allow you to plan to give ahead of time, get tax breaks when you earn more, and help support different causes while helping to simplify your charitable donations process. You can even create a DAF with your adult children and name them advisors for where the money goes. Since DAFs allow for shared charitable giving, you can teach your kids about your values and how to give back. Even after you’re gone, the advisors you choose can keep giving to charities in your name.

Make Qualified Charitable Donations

For retirees at least 70½ years old, a Qualified Charitable Distribution (QCD) can be a great strategy to adopt. A QDC is a tax-free donation from your IRA to a charity. While it’s not a tax deduction, it’s a way to help avoid getting taxed on your IRA. 

It is especially beneficial for those who have reached the age of 72 and are required to take their minimum distributions (RMDs) from their retirement accounts. Rather than being forced to take an IRA payment into your gross income, you can make separate charitable donations directly up to $100,000 per year from your IRA to a qualified charity. 

The amount transferred counts toward their RMD but isn’t included in their taxable income. This approach can help lower your overall tax liability while supporting charitable causes.

Set Up a Charitable Gift Annuity

A Charitable Gift Annuity (CGA) is a unique strategy that allows retirees to give to a charity while receiving fixed-income payments for the rest of their lives. With a CGA, retirees transfer assets to a charitable organization, paying them a regular annuity income. Many non-profit organizations and universities offer charitable annuities.

A portion of the initial gift is considered a generous donation and provides an immediate tax deduction. The remainder of the annuity payments is taxable at a potentially lower rate than other forms of income. This strategy gives retirees both a charitable impact and financial security.

Align Charitable Gifts For Your Adult Children

Even for retirees with substantial means, the tax reality is that the federal estate and gift tax is not a threat. The annual estate and gift tax exclusion applies to the gifts given to each recipient. Simply put, if you decide to gift your children $17,000 in 2023, the annual exclusion will apply to each gift. The provided table outlines the specific amount of annual exclusion relevant to the year of the gift.

Annual Exclusion per Donee for Year of Gift

Year of Gift Annual Exclusion per Donee
2011 through 2012 $13,000
2013 through 2017 $14,000
2018 through 2021 $15,000
2022 $16,000
2023 $17,000

Source: Internal Revenue Service 

Further, even if affluent, retirees are often in comparatively low tax brackets due to a lack of wages and a higher standard deduction. On the other hand, their adult children could be subject to higher tax brackets. So, why not extend the tax advantages of charitable giving to other family members?

In scenarios like these, it could be a sensible strategy to gift assets to your children with the expectation that they would then contribute the gifted amount to a charitable cause. While you won’t receive an income tax deduction, you won’t be liable for a gift tax.

Let’s consider the situation from your children’s perspective. They wouldn’t have to worry about incurring income or gift taxes on the received gift. Plus, donating this gift to a charity makes them eligible for an income tax deduction. This way, as a united family, you contribute to a noble cause and help optimize your tax savings. Ultimately, working with a professional such as a Fiduciary advisor can help navigate tax situations.

Working With a Fiduciary Advisor

If you’re looking for a way to grow your wealth in retirement, having a financial advisor is a great place to start. Financial advisors have a wide knowledge of taxes–helping to ensure you make the right decisions that align with your financial goals.

At Johnson Wealth and Income Management, we help clients prepare for retirement through a series of strategies, helping to ensure the best outcome tailored to your situation. Some of the areas that we provide advisory services on include:

  • Year-round tax planning and consulting
  • Income tax compliance
  • Wealth planning, including estate and gift tax, as well as charitable giving
  • Family trusts
  • Retirement planning and more

Final Thoughts

Utilizing charitable giving tax strategies during retirement is key for helping to safeguard your retirement. By following these tips, you can help support causes you care about while potentially enhancing your financial well-being.

Through personal financial planning, we strive to equip our clients to make decisions so that they feel secure, free, and successful, and we inspire them to a legacy of generosity and stewardship.

If it’s time to start planning your fall charitable donations strategy, we’re here to help. Contact us today to schedule your complimentary strategy session.


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