The holiday season is almost here and it is and always has been an inspiring time for charitable giving. Yet, while heartfelt, these contributions can also become part of a wise financial strategy. For those seeking to optimize their financial plans, holiday donations provide a unique opportunity to support causes you care about while also making thoughtful, tax-efficient choices. At All Seasons Wealth, we believe in guiding clients through strategic charitable giving that fits their values and financial goals.
Make Non-Cash Contributions
Holiday giving doesn’t have to be limited to writing checks or making cash contributions. There are smart alternatives that can reduce your tax burden while maximizing your impact. Consider donating appreciated assets, such as stocks, mutual funds, or even real estate, directly to your chosen charity. This approach allows you to give generously while leveraging additional tax benefits.
Why It’s Effective
- Avoid Capital Gains Taxes: By donating long-term appreciated assets instead of cash, you may avoid the capital gains taxes you’d typically pay if you sold the asset.
- Maximize Your Charitable Impact: Donating appreciated securities at full market value allows the charity to receive a larger contribution than if you sold the asset and donated the proceeds after taxes.
This is a practical way to make the most of your investments, especially for high-income earners who want to amplify their giving this season.
Combine Cash and Securities for an Enhanced Deduction
For some, cash donations might be a preferred option. But pairing cash donations with contributions of appreciated assets can lead to an enhanced deduction, allowing you to give more and save more in a high-income year. The ability to claim up to 60% of your adjusted gross income (AGI) for cash donations and 30% for securities donations provides a flexible way to increase your total deduction.
When This Approach Makes Sense
Combining cash and asset donations can be particularly beneficial if:
- You’ve had an exceptionally high-income year due to bonuses, commissions, or asset sales.
- You want to maximize your deductions to reduce taxable income this year.
This strategic pairing enables you to make a meaningful holiday impact while adjusting your tax exposure.
Consider a Donor-Advised Fund for Flexible Giving
A donor-advised fund (DAF) is a flexible, efficient way to streamline holiday donations and gain tax benefits in one go. By establishing a DAF, you can contribute a variety of assets—cash, stocks, or even real estate—and take an immediate tax deduction, while choosing the timing and charities for actual disbursement later. This approach is especially valuable for those wanting to create a structured, long-term giving plan.
How a Donor-Advised Fund Works
- Immediate Deduction: Receive a tax deduction in the year you contribute, regardless of when you decide to grant the funds to a charity.
- Tax-Free Growth Potential: DAF contributions can grow tax-free, allowing more significant support for your selected causes over time.
- Flexibility in Timing: With a DAF, you have the option to make multiple grants across charities over the years, aligning with your long-term charitable vision.
Donor-advised funds are an ideal solution for individuals seeking to blend flexibility with financial effectiveness in their charitable efforts. *
*Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes.
Holiday Giving with Retirement in Mind
If you’re approaching retirement, the holiday season is a perfect time to consider “front-loading” donations. By making larger contributions in your high-income years, you can lock in tax deductions while still working, allowing for consistent, impactful giving during retirement without compromising your fixed income. This strategy helps you make a significant charitable impact now while setting up a future filled with meaningful support for the causes you care about.
Benefits of Front-Loading
- Higher Deductions Now: While in a higher tax bracket, your deductions are worth more, making this an ideal time to donate larger amounts.
- Stable Charitable Giving in Retirement: Setting up a giving plan through a donor-advised fund allows you to continue contributing generously in retirement without added financial strain.
For those looking to create a charitable legacy in retirement, this approach offers a balance of high-impact giving and financial security.
Charitable Giving and Tax-Efficient Portfolio Rebalancing
For individuals who actively manage their investment portfolios, holiday giving can align with year-end rebalancing to create a tax advantage. Rather than selling appreciated assets to balance your portfolio, consider donating these assets directly. This method lets you achieve your rebalancing goals without facing capital gains taxes.
The Benefits of Asset-Based Giving for Rebalancing
- Tax Savings on Appreciated Assets: By donating high-value assets directly, you skip the capital gains tax, both for you and the charity.
- Maintain Cash Flexibility: This strategy keeps cash in your portfolio for other investments or for reinvesting as part of your rebalancing plan.
Donating appreciated assets during portfolio rebalancing not only supports charity but also allows for tax-efficient investment management as the year ends.
Plan for Future Deductions with a Multi-Year Strategy
Multi-year giving can be beneficial for those who want to maximize deductions over time, especially if they’re in an unusual high-income year. Under the tax code, charitable deductions can be “carried forward” for up to five years if they exceed AGI limits in a single year. This provides an opportunity to lock in significant deductions now and defer the remaining tax benefits over several years.
When Multi-Year Giving Makes Sense
This approach is ideal if:
- You’ve received a large one-time income boost, such as a bonus, asset sale, or inheritance.
- You want to secure tax benefits this year but may not need the full deduction right away.
This strategy allows you to spread your charitable contributions across multiple tax years, ensuring you receive the maximum financial benefit for your generosity.
Giving Strategically with IRA Conversions
For those considering a Roth IRA conversion, charitable donations can help offset the conversion’s tax implications. Converting a traditional IRA to a Roth IRA often triggers taxes on the converted amount. However, by pairing this conversion with a charitable contribution, you can reduce your taxable income and lessen the financial impact.
- Offset Conversion Tax Costs: Use charitable deductions to counterbalance the taxable income generated by the conversion.
- Optimal Timing: Consider this strategy in a high-income year or when planning for future retirement distributions.
For clients looking to combine charitable impact with retirement planning, this approach provides a tax-efficient way to meet both goals. *
*Unless certain criteria are met, Roth IRA owners must be 59 1⁄2 or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.
Maximizing Impact with Charitable Trusts and Donor-Advised Funds
If you have existing charitable giving vehicles, such as a private foundation or charitable trust, you might enhance your giving strategy by incorporating a donor-advised fund. Donor-advised funds offer simplicity and flexibility that can complement other structures, allowing you to make grants from your foundation or trust without the administrative burdens.
- Ease of Use: DAFs take care of legal compliance and administrative details, freeing you to focus on charitable decision-making.
- Flexible Tax Advantages: Donations to DAFs have higher deduction limits than private foundations, allowing you to take greater deductions.
By integrating a donor-advised fund with other charitable vehicles, you create a seamless, tax-effective giving system that can accommodate your evolving philanthropic goals.
Making the Most of Holiday Giving with All Seasons Wealth
As the holidays approach, make your charitable donations an integral part of your financial planning. At All Seasons Wealth, we specialize in helping clients align their charitable intentions with strategies that offer substantial tax and financial benefits. From choosing the right donation method to incorporating DAFs or retirement planning into your giving, the CERTIFIED FINANCIAL PLANNER® professionals on our team are here to support your goals.
This holiday season, give generously and wisely. Connect with us at All Seasons Wealth to explore how we can help you create a charitable giving strategy that enriches both your life and the lives of others. Let’s make this season of giving the most impactful one yet.
Disclosure:
Any opinions are those of All Seasons Wealth and not necessarily those of Raymond James Financial Services, Inc., or of Raymond James. The information contained in this presentation does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance that any of the trends mentioned will continue or that forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk, and you may incur a profit or loss regardless of the strategy selected, including diversification and asset allocation.
Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues; these matters should be discussed with the appropriate professional.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States, which it authorizes use by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
