For most Americans, as we approach the end of the year, many people look for ways to save on taxes. This is where year-end gifting strategies come into play. You may give charitably to causes and organizations you believe in, or to your children or others. In this article, we’ll cover some smart ways to execute your year-end gifts that could save you on taxes, including potential income tax, capital gains tax, and charitable deductions.
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Strategies for Tax-Efficient Charitable Giving
Non-Cash Gifts
If you plan on gifting this year, you’ll do so through either cash or non-cash gifts. Non-cash gifts may be a savvy way to give, as they could help you avoid triggering capital gains taxes. For instance, many people sell stocks in their portfolio, creating a taxable event, and then use the cash to donate to charity. However, many charities accept non-cash gifts, including appreciated securities such as stocks, mutual funds, or ETFs.
By donating highly appreciated securities directly to a charity, you avoid realizing the capital gain on your tax return while still receiving a tax deduction for the gift. Additionally, you can allocate these gifts across multiple charities if desired. This approach allows you to make a meaningful impact while also reducing your tax burden—a win-win for both you and the causes you care about.
Donor-Advised Fund
Another powerful tool for charitable giving is a donor-advised fund. At REAP Financial, we work with many clients who utilize donor-advised funds as part of their gifting strategy. A donor-advised fund acts like a charitable savings account, allowing you to donate cash, securities, or other assets and receive an immediate tax deduction. Once contributed, the assets can remain invested and continue to grow tax-free within the fund.
Keep in mind that once assets are contributed to a donor-advised fund, the gift is irrevocable—you cannot take it back for personal use. However, you retain control over how and when the funds are distributed to charities. For instance, if you have a large taxable event in a given year, such as a Roth conversion or the sale of a business, you could contribute multiple years’ worth of donations to the fund in that single year. This allows you to take advantage of a significant tax deduction now while reserving the funds for charitable giving in future years. Donor-advised funds also offer flexibility, as you can leave the funds for your heirs to allocate to charities of their choice.
Qualified Charitable Distribution (QCD)
If you’re over 70.5 years old, a qualified charitable distribution (QCD) is an excellent way to give charitably while managing your taxable income. A QCD allows you to gift funds directly from your IRA to a charity, and the amount donated counts toward satisfying your required minimum distribution (RMD) for the year. This approach can be particularly beneficial since the donated portion of your RMD is excluded from your taxable income, helping you reduce your overall tax liability.
For example, imagine you are required to take a $20,000 RMD for the year. If you decide to donate $10,000 to a qualified charity through a QCD, only $10,000 of the RMD would be taxable income. This means you satisfy the full $20,000 RMD requirement while keeping half of it out of your adjusted gross income. This can be a powerful way to manage your tax bracket and potentially avoid higher Medicare premiums or other tax implications tied to your income.
One of the advantages of QCDs is their flexibility—you can donate up to $105,000 annually through this strategy, either to a single charity or spread across multiple organizations. This makes QCDs an effective tool not only for reducing your taxable income but also for supporting the causes you care about. However, it’s important to note that QCDs can only be made from traditional IRAs, not other retirement accounts like 401(k)s, without rolling funds over first.
Converting IRA Assets to Roth IRAs
For those looking to leave a tax-efficient legacy, converting IRA assets into Roth IRAs can be a strategic move. Roth IRAs grow tax-free and do not require minimum distributions, making them ideal for long-term wealth transfer. A Roth IRA can also allow you to gift tax-free funds to your heirs, ensuring the value of your legacy remains intact.
Roth conversions require paying taxes upfront, so this strategy is best employed as part of a comprehensive financial plan. At REAP Financial, we help clients analyze the tax implications of Roth conversions and determine whether this approach aligns with their overall goals.
Optimize Your Giving with REAP Financial in Austin, Texas
If you’re in Austin or the surrounding areas and want to maximize the impact of your year-end giving strategies, REAP Financial is here to help. As experienced fiduciary financial advisers, we specialize in retirement planning, financial planning, and tax-efficient strategies tailored to your unique goals.
Contact REAP Financial Today
Schedule a complimentary consultation. Let us help you create a comprehensive plan that supports your charitable giving, tax efficiency, and long-term financial security.
Email: retire@reapfinancial.com | Phone: (512) 249-7300
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Chris Heerlein, a Texas native, is the CEO of REAP Financial and founder of REAP Private Client Group (RPCG), specializing in wealth creation, preservation, and growth for affluent individuals, business owners, and executives. RPCG provides expert financial and investment advice, advanced tax strategies, business succession planning, and unparalleled client service. Chris is a trusted financial advisor, author of Divorce With Dignity (2019) and Money Won’t Buy Happiness But Time to Find It (2017), and a columnist for Kiplinger Personal Finance Magazine.
He has been featured in Fortune, Money Magazine, Bloomberg Businessweek, and U.S. News & World Report. Chris also hosts Wealth Radio on NewsRadio KLBJ and is a sought-after speaker. Based in Austin, Texas, he lives with his wife, Hannah, and their three children and actively supports charitable causes.
