You work hard for your money, and giving back is something you’re passionate about.

Want to make your charitable giving more strategic and purposeful? Then think twice before you donate cash.

Cash is Queen, But There’s More to the Story

Sure, writing a check or entering your credit card number online is straightforward. And hey, who doesn’t love simplicity? But sometimes, other types of donations can give you more bang for your buck.

Certain assets, like appreciated stocks, other securities, business interests, or real estate, can provide extra tax perks. By donating these assets, you could avoid capital gains tax, lower your adjusted gross income, or lower your taxable income while still scoring tax deductions.

These non-cash donations can allow you to give more to your favorite causes without affecting your cash flow.

So let’s look at some options for non-cash charitable contributions and the tax benefits of each.

Charitable IRA Rollovers (QCDs)

If you’re 70½ or older, you can make a Qualified Charitable Distribution (QCD).

This fancy term basically means you can donate up to $100,000 per year directly from your IRA to a charity. For married couples, each spouse can make QCDs up to the annual limit of $100,000, for a potential total charitable contribution of $200,000.

How does this lead to tax savings?

Once you reach age 73, you must take required minimum distributions (RMDs) from your traditional IRA, SEP IRA, SIMPLE IRA, or 401(k). Those withdrawals are included in your taxable income.

A QCD counts toward your RMD but doesn’t count as taxable income, so it can help keep you in a lower tax bracket.

That’s a lot of acronyms, I know. But just remember this: QCDs are a win-win if you take RMDs.

Instead of taking an RMD, paying income tax on the distribution, and then contributing to your favorite charitable organizations, your money goes straight to the charity, bypassing the Internal Revenue Service (IRS).

To ensure your charitable donations qualify as a QCD, the funds have to go directly from your IRA to a qualified charitable organization—they can’t pass through your hands. You also need to make the donation by the same deadline as your normal RMD, which is usually December 31 of the tax year.

Real Estate and Donor-Advised Funds (DAFs)

Got a piece of property that’s been sitting around collecting dust? Consider donating it to a donor-advised fund (DAF).

A DAF is essentially an investment account for the sole purpose of supporting charitable organizations you care about. You can open a DAF through a local community foundation or major investment organizations like Fidelity, Charles Schwab, or Vanguard.

Here’s how it works:

1. You open the account and donate cash, stocks, real estate, business interests, and other types of assets to the account. You get an immediate income tax deduction for the property’s fair market value at the time of the gift.
2. The value of the assets in the account can grow tax-free while you decide which charity or charities to support.
3. You advise the sponsoring organization to make grants to your favorite tax-exempt organizations whenever it makes sense.

Donating appreciated real estate to a DAF can be especially impactful because you don’t have to sell the property and pay capital gains tax on your profits, but you get an immediate tax deduction for the fair market value of the property.

The DAF can sell the property tax-free and reinvest the proceeds, potentially growing the value of your donation over time. This means the charity will receive more value from the property donation than if you sold the property and donated the after-tax proceeds.

Charitable Remainder Trusts (CRTs)

Real estate and other appreciated assets can also support qualified organizations for years to come with a charitable remainder trust.

When you donate real estate or other assets to a CRT, you benefit from the income produced by the asset during your lifetime or a set period. Then, the remainder of the donated assets go to the charitable organization or organizations of your choice named as a beneficiary.

There are two main types of CRTS:

• Charitable remainder annuity trust (CRAT). These trusts distribute a fixed annuity amount each year, and additional contributions to the trust aren’t allowed.
• Charitable remainder unitrust (CRUT). These trusts distribute a fixed percentage based on the balance of the trust assets (revalued annually). You can make additional contributions to the trust.

A CRT is an irrevocable trust. This means you give up control of the assets you put into the trust and can’t change or revoke the trust without a court order or all of the trust’s beneficiaries agreeing to the change.

Your financial advisor can help you decide whether a CRT is right for you and which type of trust makes sense.

The tax benefits? You avoid capital gains tax from selling the asset and get an immediate tax deduction when you contribute the property to the CRT. The value of your tax deduction depends on the type of trust (CRAT or CRUT), the term of the trust, the projected income payments, and an IRS interest rate that assumes a certain growth rate of trust assets.

Donating Business Interests and Appreciated Securities

Thinking about gifting part of your business or some stock that’s been doing well? Great idea!

Donating appreciated securities can help you avoid capital gains taxes, and you can still deduct the fair market value of the donation. Your charity gets an impactful donation, and you get a valuable tax benefit.

Reporting Requirements: The Fine Print

Of course, with any tax strategy, you can’t forget about the tax code.

Non-cash donations have different reporting requirements than cash donations. Be prepared to:

• Provide documentation. For donations over $500, you’ll need to fill out IRS Form 8283 and file it with your income tax return. For those over $5,000, you’ll also need a qualified written appraisal for the donated property unless it’s a publicly-traded security.
• Keep records. Always get a contemporaneous written acknowledgment from the charity. This is basically a fancy way of saying a receipt or letter confirming the date of your donation, the value of the property you donated, and whether the organization provided any goods or services in exchange for your donation. You should have this documentation on hand before you file your return for the year. Trust me, it’ll save you headaches down the line!

Need Help Maximizing the Tax Benefits of Your Charitable Contributions?

Planning your charitable giving doesn’t have to be a solo mission. At NewWay Accounting, we’re here to help you navigate the tax rules and maximize the impact of your generosity. Reach out, and we’ll help you optimize your tax deductions while making a positive impact on the causes you care about most.