As the year draws to a close, many of us think about our opportunities to make a significant difference in our communities. This guide is tailored specifically for you if you are an affluent individual or family in or near San Antonio, TX.
Using the services of an experienced financial advisor in San Antonio, TX, they can assist you with making informed tax-related decisions related to year-end charitable giving. Not only does this type of generosity leave a lasting impact on the causes you care deeply about, but it also presents advantageous planning opportunities for reducing your tax bill in Texas.
This guide will help you optimize your impact on our community and produce meaningful tax benefits simultaneously.
Donor-Advised Funds (DAFs)
When you contribute money to a DAF, you put money into a fund managed by a sponsoring organization like a community foundation or a financial services company.
You’re eligible to take a tax deduction for the total amount you contribute in that tax year based on the limits set by the IRS. What’s more, the money in the fund can be invested, allowing it to grow tax-free, thereby increasing the potential impact of your gift.
Generally speaking, when you contribute to a donor-advised fund, you can deduct donations up to 50% of your adjusted gross income (AGI). If you’re donating cash, that limit increases to 60% of your AGI. But if you’re gifting non-cash assets that have been appreciated and you’ve held them for more than a year, the deduction limit is 30% of your AGI.
After making the initial contribution, you can recommend grants from the fund to IRS-qualified public charities over time. Unlike a direct donation, this arrangement lets you decide which charitable organizations you want to support.
However, it’s important to remember that once the money is in a DAF, the sponsoring organization has legal control. However, they follow the donor’s recommendations for disbursing funds to selected charities. This arrangement creates a win-win situation: you get immediate tax benefits, and the charities you care about receive funding, perhaps even more than initially deposited, thanks to the potential for investment growth.
Charitable Remainder Trusts (CRTs)
A Charitable Remainder Trust (CRT) is a specialized financial account that allows you to donate appreciated assets to a charitable organization while receiving income for yourself and your beneficiaries. CRTs can be an effective way to support philanthropy and minimize taxes. By funding a CRT, you receive income for life or a set period, and the remainder goes to your chosen charity. You enjoy a charitable deduction and the potential tax savings.
Here’s how it works:
- You transfer assets, most often appreciated assets like stocks, real estate, or collectibles, into a trust.
- The trust sells the assets with no tax consequences and reinvests the proceeds for you.
- The trust provides you or your designated beneficiaries with a regular income stream for a predetermined period.
- Any remaining assets, usually after the demise of the surviving spouse, are donated to the designated charity.
From a tax standpoint, a Charitable Remainder Trust offers several benefits:
- You can claim a charitable income tax deduction in the year you set up the trust based on the present value of the assets that will ultimately go to the charity. This can provide immediate tax relief.
- The trust can sell appreciated assets without incurring capital gains tax, thereby preserving more of the asset’s value for reinvestment.
- Finally, the assets in the trust are removed from your estate, which can be advantageous in terms of reducing estate taxes.
A CRT allows you to balance philanthropic goals with financial planning while reaping significant tax benefits and income.
Charitable Gift Annuities (CGAs)
A Charitable Gift Annuity (CGA) is a win-win financial instrument for both you as the donor and the charitable organizations you are giving to.
When you make a sizable gift to a qualified charity, the organization, in return, agrees to pay you a fixed annual income for the rest of your life. One of the notable advantages of a CGA is the tax benefit it offers.
You can claim an immediate charitable income tax deduction for a portion of your gift, and the annuity payments you receive are also partially tax-free.
This makes CGAs an effective tool for reducing tax liabilities while securing a steady income stream and supporting a cause you believe in.
Qualified Charitable Distributions (QCDs)
Another strategy may apply if you’re 70½ or older: making a Qualified Charitable Distribution (QCD). This financial strategy lets you give up to $100,000 directly from your tax-deferred IRA to your chosen charities, bypassing the required minimum distribution requirements.
The big perk? Because the distribution is made directly from your IRA to the charitable organization, it bypasses you completely. One of the primary tax advantages is that the QCD is not counted as taxable income, thus lowering your Adjusted Gross Income (AGI).
Just keep in mind that there are some restrictions you will have to follow.
Another approach to consider is Impact investing. This allows you to align your financial decisions with your ethical values.
When structured properly, impact investments can often be categorized as charitable donations, which are typically tax-deductible. For example, write off the initial investment amount by investing in a charitable organization that provides microloans. This can be an effective way to mitigate your tax liability while supporting your philanthropic objectives.
About PAX Financial Group
We get it —your financial journey is as unique as you are. Whether your goals center around growing wealth, safeguarding it for the future, or optimizing your retirement plans, our experienced CFPs® in San Antonio are here to craft a custom-tailored strategy that fits your goals.
But for PAX, it’s not just about the numbers. Our planning and investment services are about forging meaningful connections and standing by your side as you make important financial decisions. With our guidance, you’re not just building a portfolio—you’re building a legacy for yourself, your loved ones, and the causes you care about.
Connect with us today to learn how PAX can help you develop a thoughtful charitable donation strategy.