Income Tax Efficient Giving

With the end of the year upon us, you may be contemplating charitable giving.  Three income tax efficient ways to give are:

1. Donating appreciated assets such as securities directly to a qualified charity.

• This strategy can eliminate capital gains taxes you would otherwise incur by selling the securities separately before making a cash donation.

2. Qualified charitable distributions (QCD) from traditional IRAs to a qualified charity.

• A QCD is a direct transfer from the IRA custodian to a qualified charity. QCDs can be counted toward satisfying your required minimum distributions for the year.
• You generally must start taking withdrawals from your traditional IRA, SEP IRA, SIMPLE IRA, and retirement plan accounts when you reach age 72 (73 if you reach age 72 after Dec. 31, 2022). Failure to take these withdrawals are subject to penalties.
• Retirement-age individuals may not want to take an RMD for various reasons. They may have other sufficient sources of income. Also, the withdrawal, which is subject to ordinary income tax, may push them into a higher tax bracket, which can have adverse impacts on Social Security payments and Medicare benefits.
• A QCD allows a donor to instruct an IRA custodian to send up to $100,000 per year—all or part of the annual RMD—to one or more qualifying charities, excluding donor-advised funds.  Couples who submit tax returns with married filing jointly status each qualify for annual QCDs of up to $100,000, for a potential total of $200,000. Starting in 2023, donors can also direct a one-time, $50,000 QCD to a charitable remainder trust or charitable gift annuity. Starting in 2024, annual QCD limits will be indexed for inflation.
• The IRA assets go directly to charity, so donors do not report QCDs as taxable income and do not owe any taxes on the QCD, even if they do not itemize deductions. As QCDs do not increase taxable income, both higher tax rates and phaseouts can be avoided.  QCDs also reduce the balance of your IRA, thus lowering RMDs in the future.
• Because qualified charities do not pay income tax, the full amount of the QCD will benefit the charity.
• Note: Because the QCD will not be taxed, you will not be able to take a charitable tax deduction for the distribution.

3. Donate a traditional IRA to charity upon your death.
   • You can name a qualified charity or qualifying charitable vehicle (including donor advised funds) as to a percentage or all of your IRA upon your death.
   • Because charities do not pay income tax, the full amount designated for the charity benefits them. Otherwise, distributions of the IRA to individual beneficiaries are taxed as ordinary income.
   • Your estate will include the value of the assets as part of the gross estate but will receive a deduction for the charitable contribution, which can offset estate taxes.

Article by Mindi Zanowiak 
Sprouse Shrader Smith PLLC
2023