When done strategically, donating assets to charity can help you maximize your support for philanthropic causes while potentially leading to tax savings for high-net-worth donors and their families. Many aim to cement a legacy of generosity through their charitable donations. Maximizing the financial benefits of your gifts can ensure a lasting and impactful legacy for both your family and the causes you care about.

Donating directly to a charitable organization

Donating directly to a qualified charitable organization is a straightforward way to pursue your philanthropic goals that may provide an income tax deduction, reduce capital gains taxes for appreciated assets, or decrease the value of your taxable estate to mitigate federal estate tax liability.

Charitable contributions to a qualified organization can provide an income tax deduction between 20% and 60% of the donor’s adjusted gross income (AGI) depending on the type of asset donated and to which type of organization it is given. For example, the top deduction limit for donations to private foundations is generally only 30%, and not all organizations fit the IRS qualifications to receive deductible contributions. Generally, those who donate long-term appreciated assets (assets held for more than one year) are not obligated to pay capital gains taxes and can deduct the fair market value of these assets up to 30% of their adjusted gross income.

Donating directly to charitable organizations may also provide a way to lower your taxable estate since contributions to qualified organizations are not included in the donor’s estate for estate tax purposes. The potential sunset of certain tax provisions may lower the federal lifetime estate and gift tax exemption as soon as 2026, so taking proactive steps to lower your estate tax liability may be a prudent strategy for high-net-worth individuals.

Contributing to a donor-advised fund

Donor-advised funds (DAFs) are held at a DAF-sponsoring organization and may ultimately lower the donor’s income, capital gains, and federal estate taxes. After establishing an account, donors contribute assets to the fund which may include cash, publicly traded securities, or even privately held business interests. Assets in the fund can typically be invested for potential growth tax-free before they are distributed to qualified charities of the donor’s choosing.

In addition to providing donors with a relatively quick way to support their preferred charities, DAFs also provide distinct income tax benefits. Assuming the donor itemizes their deductions, they are generally eligible for a corresponding income tax deduction of up to 60% of their adjusted gross income for cash and up to 30% for long-term capital gains assets.

By donating appreciated assets directly to the DAF, provided IRS requirements are met and the assets have been held for more than a year, donors may also forgo paying capital gains taxes on those assets. Finally, the assets in the DAF are not subject to federal estate taxes so donating to a DAF may be another strategy for reducing the value of your taxable estate.

It is important to note that assets contributed to a DAF are irrevocable. Once the donation is made, the sponsoring organization assumes legal control of the assets before they are distributed to the selected charity. However, donors may have input on how and when the funds are granted to the charities of their choice, subject to the sponsoring organization’s approval.

Establishing a private foundation

Forming, and donating to, a private foundation may lower your income, capital gains, and estate taxes. A private foundation is a type of charitable organization that is typically funded by a single major source like an individual, family, or corporation. Private foundations may be structured as a charitable trust or as a nonprofit corporation. Ensuring your foundation complies with state law and functions to achieve your tax objectives likely requires the help of a qualified attorney.

Those who form a private foundation can leverage various tax benefits depending on how the foundation is structured and the nature of its charitable activities. For example, if the foundation qualifies for 501(c)(3) status as a tax-exempt organization, it will generally not have to pay federal tax on its income. Notably, private foundations are subject to a minimum distribution requirement that mandates a payout of at least 5% of their assets annually toward charitable activities, grants, and other qualifying expenses.

Contributions to a private foundation typically qualify for an income tax deduction up to 30% of their AGI for cash and up to 20% for long-term capital gains property. Theoretically, you could donate to your own foundation to support a meaningful charitable cause while potentially saving on income taxes.

Donors can potentially eliminate the capital gains tax on appreciated assets by donating them to a private foundation. Donations to a private foundation are also typically excluded from the donor’s taxable estate, so strategic donations may ultimately decrease their federal estate tax liability.

However, there are other tax considerations for private foundations including a 1.39% excise tax on the foundation’s net investment income and an annual filing of the Form 990-PF tax return. The IRS requires exempt organizations to make these returns public for three years, which may be an important factor for those concerned about privacy. Commerce Trust can assist you with evaluating the tax benefits of various charitable giving vehicles, in conjunction with your tax advisor, taking into consideration your specific situation and giving goals.

Making qualified charitable distributions

Two key tax benefits of utilizing a qualified charitable distribution (QCD) are lowering the amount of the contributor’s taxable income and satisfying their required minimum distribution (RMD) in a tax-efficient manner. Individual retirement account (IRA) holders over the age of 70½ can make a qualified charitable distribution (QCD) to a qualified charity of up to $105,000 each year.

This donation is not subject to taxes and donors can exclude the amount donated from their gross income. For married couples who are both over 70½ years old and each with their own IRA, the impact of this reduction can be doubled since both spouses can maximize their QCDs for a total of $210,000 per year.

For 2024 and later years, individuals over age 73 must withdraw a certain amount from their traditional IRA each year or they may be subject to a 25% excise tax on the amount that should have been withdrawn. Utilizing a QCD can satisfy RMD requirements of up to $105,000 per person. Further, since distributions from a traditional IRA are typically subject to federal income taxes, using a QCD can preserve the value of the distribution for charity without being reduced by taxes.

Figure 1 - Comparing Charitable Giving Strategies

*There is a 1.39% excise tax on net investment income for private foundations.                                                                                      **Instead, QCDs are excluded from taxable income.

Building your legacy by giving

Directing your funds to a charitable organization of your choosing allows you to pursue the philanthropic impact you would like to have on the world. No matter what cause you would like to support, strategically gifting to charity can help you achieve your estate and tax planning goals.

Assessing how various charitable giving vehicles can facilitate your philanthropic goals while providing tax benefits requires a specialized understanding of estate planning, tax management^***, and trust administration. At Commerce Trust, our private wealth management teams listen attentively to your goals and help you implement strategies informed by professionals across multiple disciplines. Our advisors will also collaborate with your estate attorney and tax advisor to ensure your plan is executed to achieve your desired goals. Contact Commerce Trust today to learn more about charitable gifting strategies that fit your wealth plan.

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*** Commerce does not provide tax advice to customers unless engaged to do so.

The opinions and other information in the commentary are provided as of August 12, 2024. This summary is intended to provide general information only, and may be of value to the reader and audience.

This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such. 

Commerce Trust does not provide advice related to rolling over retirement accounts.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Commerce Trust is a division of Commerce Bank.

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