Top Strategies for Real Estate Agents to Receive Tax Benefits on Charitable Giving
I cannot tell you if it’s the Christmas spirit or simply procrastination that leads people to make a tax-deductible gift at the end of the calendar year, but December has always been a popular time of year for giving to charitable organizations.
All jokes aside, charitable giving and the organizations they support, are a huge component of our society. In fact, in 2021, individuals gave an estimated $326 billion to charities.
And while the intent of charitable giving is always the most important aspect, there is no denying the potential corresponding tax implications of our generosity.
But given relatively recent updates to the United State tax code in 2017, only around 10% of taxpayers actually receive any tax benefit from their charitable giving via an itemized deduction.
So here is a crash course on how taxes and charitable giving are connected, along with the top 3 ways real estate agents can maximize the tax impact of their generosity.
How to receive tax deductions on charitable giving
First, we need to establish a basic understanding of how deductions work on income tax returns.
All taxpayers are entitled to the standard deduction which for 2022 is $25,900 for married filers and $12,950 for single filers.
The standard deduction was nearly doubled in 2017 via the Tax Cuts and Jobs Act and, as a result, the vast majority of Americans claim the Standard deduction on their taxes.
Conversely, if you have enough itemized deductions, you are able to add them up and claim an itemized deduction in lieu of the set amount of the standard deduction.
Itemized deductions are specific expenses such as
- Medical Expenses
- State and Local Taxes
- Home Mortgage Interest
So, let’s pretend that you are filing a single tax return and you had given $5,000 to your favorite charitable organization. You add this amount to the sum of your other itemized deductions and it totals $11,750.
This means that you are better off taking the standard deduction of $12,950 that is available to single tax filers than you are claiming your $11,750 of itemized deductions, since you get the greater of the two.
Further, this means that you did not receive any tax benefit for your charitable giving.
Now, let’s dive into the top 3 strategies for real estate agents to receive tax benefits on charitable contributions.
Strategy #1: Donor Advised Funds (DAF)
Optimizing your finances often requires navigating a variety of abbreviations, which is most certainly the case when considering a DAF.
That said, once you battle through the initial annoyance of understanding finance abbreviations, you’ll find in most cases the strategies are basic in nature at their core.
Again, this is the case with the DAF.
Think of a DAF as a cost-effective way to set up your own charitable foundation.
While Donor Advised Funds can certainly accommodate gifts with lots of 0’s behind them, DAFs also have practical uses for the charitably inclined that don’t own their own private island. Here are two DAF strategies:
Combating unusually large income years
Let’s pretend for a moment that you are having a banner year in your real estate sales business, your spouse sold their small business, and your investment accounts have crushed it as well.
All in the same year.
Having a massive income year, almost always means having a massive tax year as well. One of the most effective strategies to combat a big income tax year is to pull as many deductions as we can into that same tax year, when they are worth the most.
Let’s continue our fictional story by pretending that you typically give $10,000 per year to the charitable organizations you are most passionate about.
When combined with the other categories that make up your itemized deductions, you are unable to itemize in this scenario and are left to claim the standard deduction. Making the $10,000 gift to charity irrelevant for tax purposes.
Enter the Donor Advised Fund.
Instead of giving $10,000 per year where you are unable to itemize and receive a tax benefit, give 10 years worth of your charitable giving goals ($100,000) all at one time into a Donor Advised Fund.
This gives you a $100,000 deduction all in the big tax year via itemizing, plus you get to continue to take the standard deduction that you were going to take anyways in the following 9 years of the strategy.
And here is where the DAF really shines, implementation.
Since you are in charge of recommending grants from the donor advised fund, you get to continue your cadence of giving $10,000 per year to your charities from the DAF.
This is helpful as it doesn’t force you to give the full $100,000 to charity all in the one year, which can be problematic for some organizations vs. receiving the smaller amount each year.
In summary, this Donor Advised Fund strategy allowed you to:
- Take a deduction you would not have received otherwise due to the standard deduction
- Receive the tax benefit in your highest income tax year when it is worth the most
- Still allow you to continue your normal cadence of giving
Continuing our scenario, we’ll now look at a normal income year for your family where you continue the practice of giving $10,000 per year to charities that you are most passionate about.
As mentioned before, in this scenario after summing the categories that compose the itemized deduction you find that the total is less than the $25,900 standard deduction for married filing jointly for the tax year of 2022, so you do not receive a tax benefit for your charitable giving.
Here’s where the Donor Advised Fund comes in, again.
Instead of giving at your normal cadence of $10,000 per year, you decide to contribute $20,000 or two years worth of giving, to a donor-advised fund and then continue your normal cadence of giving.
When combined with your other itemized deductions, you are now over the standard deduction amount and will receive a tax benefit for your giving!
In the long run, this strategy might look something like this:
|Year||Current Scenario||Bunching Strategy|
|2022||Standard Deduction||Gift $20,000 to DAF and get extra tax benefit|
|2023||Standard Deduction||Standard Deduction|
|2024||Standard Deduction||Gift $20,000 to DAF and get extra tax benefit|
|2025||Standard Deduction||Standard Deduction|
|2026||Standard Deduction||Gift $20,000 to DAF and get extra tax benefit|
|2027||Standard Deduction||Standard Deduction|
With the bunching strategy, the DAF allows you to get an extra tax benefit in alternating years, while maintaining the same amount of giving at the same cadence.
Strategy #2: Gifting Highly Appreciated Assets
As you invest for your future and your assets grow over time you become keenly aware of how capital gains taxes work.
Capital gains consist of the growth of your investment and are realized when you sell a position.
So, if you purchased XYZ stock for $10 and it grew to $15 and you sold it, your capital gain would be $5.
This $5 of capital gain is taxable, which to be fair, is at a favorable tax rate as compared to ordinary income, but taxable nonetheless.
Here’s how all of this applies to charitable giving.
When we think of giving to charity, most of us think of cash donations, but you also have the additional option to give assets like stocks and mutual funds instead of cash.
The strategy of gifting highly appreciated assets suggests that instead of giving cash that you were already taxed on, you can transfer ownership of assets directly to the charity and come out ahead.
By doing this, you avoid the capital gain taxes that you would have realized if you would have sold the stock and given the cash to charity.
From the perspective of the charity, they then get to sell the shares of stock, for which they pay no income tax on since they are a tax exempt organization.
It’s a win-win!
You avoid capital gains taxes and the charity doesn’t pay tax either.
Strategy #3: Qualified Charitable Distributions (QCD’s)
Now, stick with me here and don’t let the acronyms scare you, especially if you are over 70.5 years old.
Yes, that isn’t a typo, this rule applies to individuals who have attained the landmark age of 70.5 in a given tax year.
You can ask the IRS why they picked 70.5 years old because quite honestly I have no idea.
Regardless of the random age limitations, QCD’s provide the ability to give to charity directly from your IRA retirement account.
This is so important because of the tax attributes of an IRA account both while you are working and contributing and also in retirement when you are taking money out of the account.
When you make a contribution to a retirement account while you are working, you get a corresponding tax deduction for what you put in.
So, let’s pretend you are in the 24% federal marginal income tax bracket and you make a $10,000 retirement contribution. This saves you $2,400 on your taxes.
On the flip side, in retirement when you take $10,000 out of that same retirement account, you would pay $2,400 of taxes if you are still in the 24% tax bracket at that time.
The QCD strategy allows you to contribute to a retirement account and get the deduction, but then if you give the funds directly to charity in retirement you avoid the tax on the way out.
So, there you have it.
If you are a top-producing real estate agent there is a good chance that taxes are your biggest expense each year. Using any one of these top 3 strategies you can take full advantage of your charitable giving on your tax return.