Can You Ace This Charity Quiz?

False

In most cases, clients will likely be able to deduct the entire amount donated to charity in the year the donation is made. In some cases, if the donation is large relative to their adjusted gross income, the amount they can deduct could be capped. For 2023 and 2024, charitable contributions made with cash can generally be deducted up to 60% of AGI.

The cap for appreciated assets and other types of donations can range from 20% to 50% of AGI. This can also vary by the type of organization receiving the donation. In order to claim a charitable deduction, clients must be able to itemize. Additionally, if their contribution exceeds the AGI limit, they can carry the unused deduction forward for up to five years. This can have tax planning implications in the current tax year and beyond.

2. Donor-advised funds do not allow current-year deductions for contributions to the fund, with deductions limited to years when donations are made to organizations from such funds.

True

False

False

One of the nice features of a donor-advised fund is the opportunity to receive a deduction up front in the year the donor-advised fund is funded and then to be able to invest these funds. Clients can then direct funds to an Internal Revenue Service-certified charitable organization over time.

Donor-advised funds provide a way for clients to bunch contributions into a single year to be able to itemize in that year. They can then grow these donations over time in order to increase their overall contributions to charities that matter to them. Donor-advised funds can be funded with cash, appreciated assets like securities, real estate and in some cases art or collectibles.

3. Either the market value of donated appreciated securities can be deducted or capital gains taxes can be eliminated, but not both.

a. True

b. False, the ability to do both is one of the main benefits of using appreciated securities to make charitable contributions.

c. False, appreciated securities cannot be used to make charitable contributions.

b. False, the ability to do both is one of the main benefits of using appreciated securities to make charitable contributions.

The use of appreciated securities such as individual stocks, mutual funds and exchange-traded funds to make charitable contributions to organizations that can accept them is one of the main benefits of the giving vehicle.

The market value of the securities is used as a charitable deduction for clients who can itemize. This method also allows them to avoid any capital gains taxes that would have been due had the securities been sold.

4. Qualified charitable distributions cannot be used as an itemized deduction and therefore offer no tax advantages.

a. True

b. False, they can be used as an itemized deduction.

c. False, QCDs offer several potential tax advantages.

c. False, QCDs offer several potential tax advantages.

For clients with a traditional IRA and who are at least age 70.5, QCDs offer a tax-efficient option for making charitable contributions, especially for clients who cannot itemize deductions. While these distributions cannot be used as charitable deductions for those who itemize, the distributions do come out of the IRA tax-free. Additionally, the reduction in the IRA balance serves to lower the amount of future required minimum distributions and their related taxes.

When clients reach the age when RMDs must begin, QCDs can be used to cover some or all of their RMDs for that year. This will eliminate the taxes on any RMDs that were satisfied by taking a QCD. For sequencing purposes, the QCDs must be taken before clients have satisfied their RMD for the year with other distributions.

5. Portfolio rebalancing and charitable giving can work together.

True

False

True

Advisors regularly rebalance clients’ portfolios to ensure that their asset allocation remains in line with the long-term investing strategy they have implemented. When rebalancing within taxable accounts, it is common to need to reduce some shares of stocks, mutual funds or ETFs that have appreciated in value.

One option is to sell these shares and to use the cash to purchase other holdings that are in undervalued asset classes. This will incur taxable gains and, all else being equal, can increase a client’s tax bill. Taking some or all of these appreciated shares and donating them directly to an IRS-approved charity can result in a tax deduction for those who can itemize and will eliminate the capital gains taxes that would be due if the shares had been sold.

6. Timing of charitable donations is irrelevant.

True

False

False

With the implementation of the Tax Cuts and Jobs Act for the 2018 tax year, the ability to itemize deductions was limited for many taxpayers. This includes the deduction of charitable contributions. One strategy is for clients to strategically time when charitable contributions are made to maximize their tax deduction so they can itemize these contributions and other deductions.

The strategic timing of charitable contributions can be part of a strategy to bunch itemized deductions into a certain year to be sure that clients can itemize deductions in that year. This strategy could include certain medical expenses to get over the 7.5% of AGI hurdle or certain business expenses for those who are self-employed in addition to bunching charitable contributions for that year. If possible, clients might try to sync this bunching with a year in which their income might be higher than normal.

7. Charitable trusts offer advantages beyond charitable giving.

True

False

True

Charitable trusts can be a versatile planning tool for many clients. First, they can be funded with donations of cash, or other assets such as stocks, bonds, ETFs, mutual funds or real estate. Appreciated assets can be used, and this will avoid incurring capital gains taxes. Charitable trusts allow donated assets to grow tax-free and are a way to get these assets out of the estate of high-net-worth clients who will be affected by the sunsetting of the current estate tax exemption limits after 2025.

Charitable remainder trusts allow the donor, their family or other beneficiaries to benefit from trust distributions for their lifetime or a set period of time, with the remainder of the trust then reverting to designated charitable beneficiaries. With a charitable lead trust, payments first go to the charitable beneficiaries and then to family or other beneficiaries at the end of the trust term.