Benefits of Charitable Giving in Retirement

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As you planned and saved over the years of your working life, you might have also considered those in need. By year-end, you may have made enough charitable donations to qualified organizations to also enjoy the benefits of charitable giving. You felt good by doing good.

Now that you’ve retired, you can still take advantage of many charitable giving tax benefits. Here are some of the ways to do that.

To start taking advantage of charitable giving during retirement, calculate your taxable income for this year and how much you can afford to give. You can use the standard deduction, which has increased considerably. You can deduct up to $600 in cash contributions to eligible organizations for the 2021 tax year. The maximum deduction for 2022 has not been determined but is likely to be either $300 or $600.

In any case, if you’re not sure how you’ll file or what your income might be, the best place to start is last year’s return. Unless your income or employment status has changed markedly, your prior year return is a good initial guide.

As noted, the IRS permitted standard-deduction taxpayers to deduct charitable donations of $300 in 2020 and $600 in 2021. The deduction should be available for 2022 gifts, although the IRS has not determined the allowable deduction.

Here are other donation types which benefit not only the target organizations but also your own tax bill and pocketbook.

You have the option to make a qualified charitable distribution directly from your IRA  to the charity of your choice. By contributing directly from your IRA, you can avoid paying income tax on the distribution. It also works when you must take Required Minimum Distributions (RMD) but don’t need the distribution for your daily living expenses. You can contribute up to the full amount of your RMD avoiding any tax consequences on the RMD for that year.

Form 1040 instructions explain how to account for charitable deductions. If the contribution came from a non-deductible IRA, additional tax documents may be required. Consult your tax professional for additional information.

You can also make charitable gifts of assets, such as appreciated stocks or bonds. You won’t have to pay capital gains taxes on those instruments. By donating them, you deduct their appreciated fair market value without raising capital gains by selling them to donate cash to the qualified charitable organization. This allows the amount you would have paid in taxes to stay with the charity, which doesn’t pay taxes.

Once again, you’ll want to consider whether the standard deduction makes this a useful strategy for you or not. If you’re not itemizing, a $300 or $600 stock donation won’t avoid a lot of capital gains taxes.

If you’re planning a lot of charitable giving and have sufficient assets, you can consider creating a donor-advised fund. This method lets you make distributions to the charitable organizations of your choice. A donor-advised fund is a separate account operated by a qualified charitable organization, called the sponsoring organization. The account includes contributions made by various donors.

As the donor, when you make a contribution, the organization has legal control over it. However, you or your representative can still advise about the distribution of funds and the investment of assets in the account.

You can deduct a significant portion of your donor-advised fund contribution. However, you should know that the IRS is aware of abuses related to the use of donor advised funds. So, do your due diligence and talk to your financial advisors to find the best options for you.

As you can see, retiring doesn’t mean you can no longer make contributions to qualified charitable organizations. In fact, with IRAs and other retirement vehicles, it can even be easier to make them.

Another benefit of retirement is that you can make a gift that most charitable organizations are desperate for in today’s busy world — your time. At the beginning of this century, one in four Americans volunteered. Today that number is far less, especially since the pandemic began. Think about ways that you can be of value, both as a giver and a volunteer or even a cyber-volunteer. You’re still feeling good by doing good.

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