Top 7 charitable giving strategies: Maximizing tax benefits and impact

Charitable giving is a personal choice you make throughout your lifetime. It feels good to be generous with the resources entrusted to your care. And making a plan for your charitable donations can be even more empowering.

You have a lot of options when it comes to how you donate to your chosen charities. From cash gifts to setting up charitable trusts, different methods of giving can serve different purposes and offer distinct tax advantages. Understanding these options is important to make your philanthropic efforts as impactful as possible—both for the recipient and for you.

Let's explore key methods for making charitable donations and the income tax advantages they offer. Keep in mind that some of these tax benefits only are available to you if you itemize deductions rather than claiming the standard deduction when filing your income taxes. A tax professional can help you decide which option will provide the maximum tax benefit.

Donor-advised funds are the fastest-growing option in charitable giving.

When you open a donor-advised fund (DAF), you contribute to a personalized fund earmarked for future charitable donations. You can contribute to the fund with gifts of cash, stocks, real estate, private business interests and more. The money remains in the fund and the money has the potential to grow until you decide on the charities that will receive the money. That can happen soon or years down the road.

One of the reasons donor-advised fund accounts are so popular is their versatility. You have the flexibility to change your mind about which charities to fund. You can support several charities with small or large gifts during your lifetime and after you pass away.

Donor-advised funds allow you to claim an immediate deduction in the year the contribution is made. As soon as you make a gift to a DAF, the gift's fair market value (i.e., the amount given if it's cash or the appraised value of an asset like real estate) is considered a donation and may be eligible for a tax deduction in that tax year.

Any investment growth stays in the fund. It's not taxable income for you, and it increases how much you have available to give.

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How to create and use a donor-advised fund

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Charitable trusts offer ways to set up your assets to benefit you, your beneficiaries and a charity all at the same time. There are two main types of charitable trusts: charitable remainder trusts and charitable lead trusts.

A charitable remainder trust (CRT) is set up so that you or others you designate have an income stream from the trust while you're alive. The charity receives the remaining proceeds upon your death or a term of years. You can choose different types of charitable remainder trusts, including:

• Charitable remainder unitrust (CRUT). With a unitrust, you can make multiple gifts of cash and publicly traded securities. Another type of unitrust allows gifts of more complex assets, such as real estate and closely held stock. Your income payments are calculated annually based on a set percentage rate and the value of the trust's assets.

• Charitable remainder annuity trust (CRAT). An annuity trust is similar to a CRUT, but you fund it with a one-time gift of cash or securities. You or someone else you name can then receive ongoing fixed-income payments for your lifetime or a term of years.

Charitable remainder trusts allow you to take an immediate tax deduction in the year the contribution is made based on the present value of the remainder interest that will eventually go to charity. Placing assets in the trust removes them from your estate, potentially lowering your estate tax liabilities. Contributing appreciated assets to a charitable trust also allows you to potentially avoid immediate recognition of capital gains taxes from selling those assets.

It's helpful to think of a charitable lead trust as the opposite of a charitable remainder trust in that you support the charity for a predetermined period before your loved ones. You will designate the trust as either a grantor or nongrantor trust, and that will determine where any remaining assets go at the end of the period:

• Grantor trust. The remaining assets go back to you as the donor, or your spouse, at the end of the charitable payout period.

• Nongrantor trust. The remaining proceeds go to your family or others upon your death or at the end of the term of years.
  

The designation of the trust affects the tax treatment of both the donated assets and the income the trust generates.

• Grantor trust. The donor is able to claim an immediate charitable donation income tax deduction for the assets placed within the trust. The value of the deduction is the present value of payments the lead beneficiary is expected to receive for the duration of the trust term, subject to IRS limits. Any income generated by the trust is reported on the donor's personal tax return and taxed at the appropriate rate.

• Nongrantor trust. No immediate charitable donation income tax deduction is available for the donor when assets are placed within the trust. The grantor also does not incur a personal income tax liability on trust income. Instead, the trust files its own tax return and is liable for any income tax. The trust is able to claim a tax deduction for the value of any payments made, so it's not likely to have an income tax liability as long as it pays out the income earned during the tax year.

With a charitable gift annuity (CGA), you give cash or securities that eventually will help charities you care about. In the meantime, you receive a lifelong stream of income from your gift. You can begin receiving payments immediately or defer payments until a future date. When you die, what's left in the CGA will provide ongoing, annual support to your favorite charities or causes for a preestablished time when the remainder is going into a fund at Thrivent Charitable. Otherwise, the named beneficiary of the CGA will receive a lump-sum one-time payment.

Tax benefits of charitable gift annuities

With a CGA, you may be able to claim a tax deduction at the time of your original gift. The deduction is based on the present value of the amount that eventually will go to charity after all the annuity payments have been made. A portion of the annuity payments you receive may also be tax-free for a period of time based on your statistical life expectancy.

Watch this brief video to learn more about charitable gift annuities

A qualified charitable distribution (QCD) is a direct transfer of assets from your IRA, payable to a qualifying charity. QCDs count toward your annual required minimum distribution (RMD), so they're an excellent way for people aged 70½ or older to satisfy RMD requirements in a tax-efficient way while making a charitable impact.

The age at which you must start taking RMDs depends on when you were born:

• If you were born between 1951-1959: You can delay your RMD age to 73.
•  If you were born in 1960 or later: Your RMD start age is 75.

You can transfer up to $108,000 annually from IRA assets to qualifying public charities. This amount will be indexed for inflation going forward.

When you donate via a QCD, the distribution from your IRA qualifies as a direct transfer and won't be included in your adjusted gross income, but it counts toward your required minimum distribution. By reducing your taxable income, QCDs could help bring you into a lower tax bracket, resulting in a lower overall tax bill. Making a QCD also reduces your modified adjusted gross income for Medicare and Social Security purposes, potentially allowing you to avoid higher Medicare premiums or taxes.

Is a QCD right for you?

If you are 70½ or older, you have the option to use your individual retirement account (IRA) assets to create a charitable fund that supports your favorite charities. This is accomplished through a qualified charitable distribution (QCD). Watch a brief video about how they work, and the potential benefits.

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Donating appreciated noncash assets like stocks, mutual funds or real estate can be very tax-efficient.

• Gifts of stock and mutual funds. Giving stocks and other securities can be a potentially tax-efficient way to support causes you care about.

• Gifts of real estate. Some charities accept donations of real estate. The charity might use the property itself, but in many cases, it sells the property and uses the income to fund its mission. While donating real estate outright may be one giving option, other ways of giving may be more appealing if you want to retain the benefits of owning the property for as long as you're alive, or to generate income. See the other options to make a charitable impact with real estate

If you own highly appreciated noncash assets, you may face a significant capital gains tax bill when you sell those assets. When you gift these assets, you generally receive a tax deduction for the full market value of long-term appreciated assets without incurring capital gains tax on the appreciation. These gifts also can reduce the size of your estate.

Gifts of life insurance may allow you to give a more generous gift to the charities you care about than you could otherwise. Just as life insurance provides for loved ones upon your death, it can support your favorite causes in a similar way. There are various ways to give life insurance, and each has its advantages. Your financial advisor can help ensure your gift reflects your goals and priorities.

Transferring ownership of an existing life insurance policy to a charitable organization allows you to take an immediate tax deduction. If you're still paying premiums on the policy, you can deduct those premiums as long as you make the payments. Plus, the policy is removed from your estate for estate tax purposes.

Watch this video on how charitable life insurance works

You can designate a charity to receive beneficiary proceeds from tax-deferred retirement accounts, such as your IRA or 401(k), or an annuity or life insurance policy. You also can give assets, such as stocks, bonds or real estate, through your will or revocable trust.

Your heirs may avoid paying income taxes on assets given, and the value of your estate will be reduced for estate tax purposes.

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Charitable Strategies: Bequests and Beneficiary Proceeds

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If your income tax situation—today and in the future—plays a role in your charitable decisions, now is the time to begin planning. The avenues for philanthropy are diverse, each with its own set of advantages, considerations and tax consequences.

This is where the expertise of a financial advisor becomes invaluable. A professional who is well-versed in charitable giving can collaborate with your personal tax advisor to help you identify charitable giving tax strategies that align with your financial goals and philanthropic aspirations.

Connect with a Thrivent financial advisor near you for specific guidance on developing a giving strategy that reflects your unique financial plan and the causes you hold dear.