I am my favorite charity.
— Thomas J. Stanley and William D. Danko, The Millionaire Next Door: The Surprising Secrets of America’s Wealthy, 1996
- Donor advised funds (DAFs) are funds or accounts maintained and operated by sponsoring Section 501(c)(3) organizations. Irrevocable transfers into DAFs may be eligible for federal income tax deduction from adjusted gross income (AGI) by transferors in the year of contribution and may be invested tax free within the DAF before distribution to qualified charitable organizations. While transferors retain investment and distribution advisory privileges, sponsoring organizations retain legal control and may ultimately direct the investment and distribution of assets. Advantages of DAFs may be offset by their added costs and fees. Notably, while transfers into DAFs are ineligible for qualified charitable distribution (QCD) treatment, distributions of cash from IRAs to fund DAFs may be eligible for federal income tax deduction from AGI.
- Qualified charitable distributions (QCDs) from IRAs: Individuals aged 70.5 or above may transfer funds in aggregate up to $105,000 (2024, indexed to inflation beginning in 2022) annually directly from their IRA custodian to qualified public charitable organizations without recognition of this transfer amount in the transferor’s gross income for the same tax year, to the extent that the transfer amount would have ordinarily been recognized as gross income (e.g., excluding any pro rata share of IRA distributions allocated towards non-deductible IRA contributions). A one-time election for a QCD up to $53,000 (2024, indexed to inflation) may be made from an IRA to a split-interest entity, including a charitable gift annuity, charitable remainder unitrust (CRUT), or charitable remainder annuity trust (CRAT), beginning in 2023. The transfer amount may in-part or in-whole satisfy the required minimum distribution (RMD) for the same tax year. Notably, employer sponsored retirement plans (e.g., 401(k) plans) are ineligible for QCDs.
- Grouping or bundling of charitable transfers to maximize charitable federal income tax itemized deductions from adjusted gross income (AGI) in a single tax year.
- Transfers to qualified charitable organizations offer income tax and transfer tax benefits:
- Federal gift taxes: Charitable lifetime transfers are 100% deductible at fair market value to an unlimited dollar amount.
- Federal income taxes: Charitable lifetime transfers may be variably deductible from adjusted gross income (AGI) up to 60% of the transferor’s AGI (contribution base) with valuation of the deduction potentially derived from the transferor’s adjusted cost basis or fair market value of the transferred property. Income tax deductibility rules are complex and dependent on the classification of property transferred, classification of qualified charitable organization, use of property by the qualified charitable organization, and the transferor’s tax elections:
- Public charities, private operating foundations, and certain private non-operating foundations:
- Cash: Valued at fair market value. Deductibility ceiling is 60% of the transferor’s AGI.
- Ordinary income property and short term capital gain property: Valued at lesser of transferor’s adjusted cost basis or fair market value. Deductibility ceiling is 50% of the transferor’s AGI.
- Long term capital gain property:
- Intangible property: Valued at fair market value. Deductibility ceiling is 30% of the transferor’s AGI. Alternatively, a special election is available to the transferor to value at transferor’s adjusted cost basis with a deductibility ceiling of 50% of the transferor’s AGI.
- Tangible personalty:
- Transferred property used by the qualified charitable organization in its tax-exempt purpose: Valued at fair market value. Deductibility ceiling is 30% of the transferor’s AGI. Alternatively, a special election is available to the transferor to value at transferor’s adjusted cost basis with a deductibility ceiling of 50% of the transferor’s AGI.
- Transferred property not used by the qualified charitable organization in its tax-exempt purpose: Valued at lesser of transferor’s adjusted cost basis or fair market value. Deductibility ceiling is 50% of the transferor’s AGI.
- Realty: Valued at fair market value. Deductibility ceiling is 30% of the transferor’s AGI. Alternatively, a special election is available to the transferor to value at transferor’s adjusted cost basis with a deductibility ceiling of 50% of the transferor’s AGI.
- Other private non-operating foundations and qualified charitable lead trusts:
- Cash: Valued at fair market value. Deductibility ceiling is 30% of the transferor’s AGI.
- Ordinary income property and short term capital gain property: Valued at lesser of transferor’s adjusted cost basis or fair market value. Deductibility ceiling is 30% of the transferor’s AGI.
- Long term capital gain property: Intangible property, tangible personalty, and realty are all valued at transferor’s adjusted cost basis (qualified appreciated stock in certain instances may be valued at fair market value). Deductibility ceiling is 20% of the transferor’s AGI.
- The overall deductibility ceiling for combined transfers of non-cash property in any given tax year is 50% of the transferor’s AGI. This deductibility ceiling is reduced first by cash transfers, then 50% gifts, then 30% gifts, and then 20% gifts.
- Charitable transfers in excess of the deductibility ceilings in any given tax year may be carried forward and applied up to a maximum of 5 tax years.
- Public charities, private operating foundations, and certain private non-operating foundations:
- Federal estate taxes: Charitable bequests at death are 100% deductible at fair market value to an unlimited dollar amount. Unlike lifetime transfers, bequests at death are not deductible for income tax purposes.
- Charitable trusts may be considered by donors desiring to make charitable transfers with retained interests (charitable transfers of a split interest). Living (inter vivos) trusts are preferable due to potential charitable federal income tax deduction and retained interests enjoyed during the lifetime of the donor. These may include pooled income funds, charitable remainder trusts (annuity, or “CRAT”; unitrust, or “CRUT”), and charitable lead trusts (annuity, or “CLAT”; unitrust, or “CLUT”).
- Income in Respect of a Decedent (IRD) assets (e.g., IRA assets, employer sponsored retirement plan assets, annuity contracts, U.S. savings bonds) are ideally suited for bequests to qualified charitable organizations: the decedent’s estate benefits from the unlimited charitable deduction while the recipient qualified charitable organization is exempt from income tax liability. Please reference “Legacy planning considerations” topic for discussion regarding IRD assets.
- IRS Tax Exempt Organization Search Tool for tax-deductible charitable transfers: https://apps.irs.gov/app/eos/