The Joy of Giving: A Brief Overview of Common Charitable Vehicles
Suppose for a moment that you received an unexpected $1,000. What would you do with that money? Pay down a credit card balance? Buy something for yourself that you’ve had your eye on? Stick the money in your investment account? Perhaps the “best” answer would be to give that money to others. If you’re on solid financial footing, I would contend that donating to charity is not only a boon to the recipient but also a major mood-booster. The knowledge that you’re giving back to your community and donating to causes that resonate with you is hugely empowering and, in turn, can make you feel happier and more fulfilled. If you’re so inclined, there are few better times than the holidays to exercise your generosity muscle. Here is a brief overview of a few of the most common charitable vehicles.
Annual gift tax exclusion
The easiest way to donate is by using the annual gift tax exclusion. Gifts below the annual exclusion (i.e., $18,000 for 2024 and $19,000 in 2025) bear no tax consequence to either donor or recipient. Simply write a check up to the prescribed amount and you’re done – no tax filing or reporting required. Married couples can double their charitable impact, as the limit for any one recipient is $18,000 for each spouse for a total of $36,000. As an alternative to cash, donations of appreciated securities (where possible) can also help the donor avoid capital gains tax. I often see this technique used to fund 529 plans for children or grandchildren or to help loved ones in need.
Qualified Charitable Distributions (QCDs)
QCDs allow investors 70 ½ and older to donate pretax funds directly from their traditional IRAs to charities and owe no income tax on those withdrawals. The QCD limit is $105,000 for 2024 and $108,000 for 2025 for each IRA owner and can encompass many separate donations. Further, QCDs can be subtracted from Required Minimum Distribution (RMDs), thereby lowering taxable income, the 3.8% surtax on net investment income, and the Medicare IRMAA charge. However, doing so can be somewhat logistically complicated, as QCD donors must have their IRA sponsor cut checks to the charities or write checks directly from the IRA, and they must ensure that the charities properly acknowledge the gifts and receive the checks and cash them before year-end.
Donor-Advised Funds (DAFs)
Unlike QCDs, DAFs have no age restriction and can be appealing to those who are uncertain about where they want their funds to go. With a DAF, the donor gives money or assets to a dedicated account at an umbrella charity and gets an immediate tax deduction. Donors can then postpone further giving decisions until they’re ready and the funds are invested and grow tax-free until disbursement. Logistically, DAFs are less complicated that QCDs, as the sponsors handle any required paperwork. Caution must be taken, however, to fully understand the effects of DAF contributions and their interplay with the standard deduction and AGI.
Conclusion
As usual there are caveats surrounding each donor and their individual circumstances. Even though these vehicles are now quite common and standardized, be sure to consult with your financial advisor and tax accountant before proceeding.