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Efficient Strategies for Charitable Giving

In some ways, the coronavirus pandemic brought out the best in our society, as Americans increased their philanthropic gifts throughout the course of the year. Charitable giving increased 10.6% in 2020 from 2019, according to the Fundraising Effectiveness Project, with gifts of $1,000 or more increasing by 10.4%.

But while we were generously supporting desperately needed organizations devoted to such things as feeding the poor and healthcare, many nonprofits in areas such as arts and education felt the pinch. As we return to normal in 2021, it's worth seeking out organizations that lost ground in 2020.

Fortunately, there are many different strategies available to help you make the most effective use of your generosity. Here are a few ways you can help make your gift most efficiently.

Direct Contributions

When you make a contribution directly to a 501(c)(3) public charity or private foundation, you can claim a charitable deduction on your income taxes. But keep in mind that the claimed deduction only becomes effective if you itemize deductions, and that the standard deduction has moved higher in recent years. The 2021 standard deduction stands at $12,550 for single taxpayers and $25,100 for married taxpayers filing jointly. So to fully take advantage of the deduction potential, your contribution, combined with other itemized deductions like property taxes or mortgage interest, should exceed that level.

Donor‐Advised Funds

Some high‐net‐worth individuals establish a private foundation for their charitable activities, but a donor‐advised fund (DAF) can provide many of the same benefits, without the operating expense or administrative burden. Here's how it works: You make a contribution to a DAF established by one of several financial organizations, investing those assets in a variety of vehicles and receiving an immediate tax deduction. You then decide how much to send each of your chosen charities, or the fund can then recommend public charities to receive your grants.

QCD from an IRA

If you have an IRA, the Qualified Charitable Distribution (QCD) rules allow you to make a distribution of up to $100,000 directly to a qualified charity without treating it as taxable income. You must be at least age 70½ to take advantage of a QCD.

Appreciated Securities

An alternative to a QCD is donating appreciated stock to a charity. The greater the appreciation on the stock, the greater the tax benefit of donating it as opposed to donating assets from other sources. As long as you've owned the security for more than one year, you can avoid capital gains tax on all the appreciation in value. If the gifted stock has been held less than a year, you can still get a deduction, but it will be the cost basis on the shares, which most likely is less than current market value.

Charitable Trusts

There are two basic flavors of charitable trusts you can set up: a charitable remainder trust or a charitable lead trust. A charitable remainder trust pays out a specific amount over a period of years to your named beneficiary, with the remainder going to your designated charity. The charitable lead trust is the opposite, with the charity getting their payment first over a fixed period of years. After that, the remaining assets go to your named beneficiaries. These trusts also offer estate planning benefits, since they can move a significant amount of assets out of your taxable estate.

These are only a few of the strategies that you can use to spread your wealth throughout your community in responsible ways. If you'd like some help in exploring how you can more effectively help organizations that are still recovering from the pandemic, call your Baird Financial Advisory team.

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