To Inform:

As we approach the end of 2024, for some this is an opportune time to give to charities, churches and other non-profits we’re passionate about, especially as the holidays draw near and the picture becomes clearer on how income and taxes will shake out. There are many avenues in which you can give, but Qualified Charitable Distributions (QCDs) and Donor-Advised Funds (DAFs) are two ways the IRS gives us to maximize tax savings through charitable giving.

What is a QCD and how does it work?

A QCD is a distribution from an IRA that qualifies for tax-free treatment when given to a qualified organization as defined by the IRS. This is a powerful tool that comes with some stipulations such as an individual being at least 70.5 years old with an annual QCD limit of $105,000 (2024 and index adjusted annually). This tax-free treatment is monumental when talking about Required Minimum Distributions (RMDs). An RMD is the amount that a person of a certain age (age 73 for those born between 1951 and 1959) must withdraw from their IRA. This is a way of collecting taxes on your pre-tax dollars that have been building for years in your IRA because the distribution is usually fully taxable as ordinary income in the year of the distribution. Instead of paying taxes on this RMD income, QCDs provide a planning opportunity to take the distribution tax-free. Even if you’re not yet 70.5 with a distribution requirement, a QCD can still be a beneficial tool that can lower your IRA balance along with future RMDs.

What is a DAF and how do I use it?

What if you’re not 70.5 yet and still want to give generously for maximum tax benefit? A Donor-Advised Fund (DAF) offers a great opportunity to gift not just cash but also appreciated stocks and other assets to potentially offset current income for tax purposes if itemizing your taxes. A DAF is an account that you donate to for the purpose of charitable giving. The account is administered by a public charity to be managed for individuals, families, or organizations. Once funded, the holdings in the DAF can be invested like other accounts and grow, if left in the account for extended periods, or be immediately gifted. While gifting cash may offer a tax deduction when itemizing taxes, gifting appreciated stock may be a great option that could maximize tax benefits, especially during high income years. Why? When you gift appreciated stocks to a DAF, the large capital gain that is normally taxed when sold, is nullified when gifted to a DAF. In addition, any deduction is based on the fair market value of the gifted shares (which can be up to 30% of Adjusted Gross Income). There is no limit to how much you can contribute to a DAF or charity each year, but there is a limit to the amount of deduction you can take for any contribution in a given tax year. As mentioned, your gift to a DAF is just that – your control over the gifted assets in your DAF is limited to investment decisions and making recommendations to the account administrator for charities that you want to receive the grants from your DAF account. This is something to think about when contemplating this strategy but for those who are charitably minded, it makes great sense. DAFs also provide a legacy opportunity for giving in which you can name a successor(s) or charitable beneficiary to continue your giving legacy with any remaining funds. What a powerful tool!

There are many factors that go into deciding what tool to use and when. Whether utilizing QCDs or DAFs, each can be useful independently or even be utilized in the same tax year for some individuals. We encourage you to reach out to your advisor at The Joseph group for a discussion on what makes the most sense for you – we’re here to help! And please join our upcoming webinar: Charitable Giving Strategies to Maximize Your Impact, happening Thursday, November 21 at 12PM to hear more about some popular giving strategies. You can register here.

“If you’re givin’ while you’re livin’, then you’re knowing where it’s going” – Larry Burkett

Written by Alex Jenney, Wealth Advisory Associate