Motivations for Giving
Why do you make gifts to charity? According to the 2021 Bank of America Study of Philanthropy: Charitable Giving by Affluent Households, the primary reason respondents gave is that they believe in the mission of the organization (58.2%). Believing their gifts could make a difference was cited by 45.1% of respondents. Nearly one-third (31.4%) gave for personal satisfaction, enjoyment, or fulfilment. The study asked high-net-worth donors, defined as those with household incomes greater than $200,000 annually and/or net worth of more than $1 million (excluding the value of their homes), a variety of questions on their giving habits.

Not all charitable gifts come from donors who are high net worth, of course. In fact, many generous individuals fall well below those thresholds. But the motivation is probably the same for most donors. Not surprisingly, only 14.5% listed tax benefits as a motivation. While income tax charitable deductions are available for gifts to charity, millions of people who don't itemize their deductions, and who therefore receive no tax benefit, give to charity every year.

High-net-worth individuals, like many other donors, gave primarily by cash, check, or credit card (95.2%), although 5.2% reported giving publicly traded securities and 8% say they gave through their IRAs (qualified charitable distributions). Nearly one-third of respondents report they either currently have a will with charitable provisions (16.5%) or plan to establish one within the next three years (16.2%).

When to Take Distributions
Withdrawals from IRAs and 401(k) accounts prior to age 59 1/2 generally will be subject to both income tax, at ordinary income rates, and a 10% penalty. After age 59 1/2 the penalty no longer applies, although income tax will still be owed (except for qualified withdrawals from Roth IRAs). Starting in 2023, minimum distributions must begin from traditional IRAs and most 401(k) accounts at age 73 (for those turning age 72 after 2022). Failure to take required withdrawals can result in a 50% penalty. While many people postpone withdrawals as long as possible to avoid the income tax, there may be instances where taking a little now can avoid taking a lot later.

Taking withdrawals prior to age 73 doesn't mean you have to spend the money. The distribution can be invested in a brokerage account, where it can continue to grow. If and when assets are sold in the brokerage account, there may be favorably taxed capital gain on any growth (generally 15% or 20%, although taxpayers in lower brackets pay zero capital gains tax). Assets remaining in the brokerage account at death receive a stepped-up basis, allowing those who inherit to sell with no capital gains tax. Funds in an IRA or 401(k) in an estate, on the other hand, are subject to income tax when withdrawals are made after the owner's death.

If you're already over age 70 1/2, ask your financial advisor whether you should make your gifts to Brookfield Zoo Chicago directly from your IRA. You can void tax on qualified charitable distributions (QCDs) of up to $105,000. A QCD can take the place of all or a portion of your required minimum distributions, resulting in tax savings even though no charitable deduction is available. 

The SECURE Act, passed in late 2019, includes provisions that may impact charitable giving.

1. IRA owners who turn 70½ in 2020 or later can wait until the year they turn age 72 to begin taking required minimum distributions. They may, however, begin making tax-free qualified charitable distributions from their traditional and Roth IRAs after reaching age 70½.

2. The “stretch IRA” is eliminated for most beneficiaries. Previously, a younger family member could be named beneficiary of an IRA and take distributions in smaller annual amounts, over his or her life expectancy. This allowed the IRA to continue growing tax sheltered and spread the income taxes owed on distributions over potentially many decades. With a few exceptions, the stretch IRA is now available only for surviving spouses. A non-spouse generally must distribute the entire IRA within ten years, which may result in higher income taxes.

Charitable opportunity: IRA owners may have all or a portion of their accounts pass to a charitable remainder unitrust that makes payments to younger family members. Not only do beneficiaries receive payments for life, similar to the stretch IRA, but when the trust ends, remaining assets pass to charity. If the IRA owner’s estate is subject to tax, an estate tax charitable deduction is available for the value of the remainder interest in the trust.

In late 2022, the SECURE 2.0 Act was passed, with several provisions affecting charitable donors:

1. The age at which required minimum distributions from retirement accounts must begin is gradually being raised. In 2023, the age is increased from 72 to 73 for those reaching age 72 after 2022. By 2032, the age increases to 75. IRA owners can continue making qualified charitable distributions (QCDs) directly to charities at age 70 1/2.

2. Donors eligible to make QCDs can make a one-time election to establish a charitable remainder trust or charitable gift annuity of up to $53,000 from their IRAs. The donor and/or spouse are the only permissible recipients and no additional funds may be added to the remainder trust or gift annuity. All payments received by the donor are taxed at ordinary income rates. 

Provisions and Strategies for Charitable Giving in 2024
Here are some charitable giving strategies to consider:

1. Qualified charitable distributions (QCDs) from IRAs are advantageous for eligible donors. Although no charitable deduction is available, the income tax that is normally owed on withdrawals is avoided. In addition, because QCDs can satisfy required minimum distributions, income tax savings can be realized. QCD rules:

• Donors must be at least age 70½ on the date of the gift.
• QCDs can come only from IRAs, not 401(k)s or other retirement accounts.
• A maximum of $105,000 may be given annually.
• The transfer must come directly from the IRA custodian.
• QCDs can be made only to public charities, not to private foundations or donor advised funds.
• Distributions can be used to satisfy a donor’s pledge.

2. Life-income gifts such as charitable remainder trusts and charitable gift annuities offer several advantages to satisfy philanthropic goals.  Because deductions for remainder trusts and gift annuities tend to be larger, donors may be able to itemize in the year a gift is arranged.  Payments from life-income gifts may be attractive to donors who would normally make bequests to charity through a will or living trust, providing income tax, and possibly capital gains tax, savings.

3. Making gifts of highly appreciated assets allows donors to avoid the capital gains tax that would be due if the assets were sold, offering tax savings even if the taxpayer uses the standard deduction.

4. Those with donor advised funds can direct gifts to public charities. A donor may be able to itemize by making a larger gift to a donor advised fund, from which annual gifts can be made over several years.  Contributing appreciated securities to a donor advised fund provides added tax savings.

Donors wishing to retain payments for life from their IRA gifts can choose to fund a charitable remainder trust or charitable gift annuity with up to $53,000. This one-time option can be payable only to the donor and/or spouse. No other funds can be added to the remainder trust or gift annuity. All payments received will be taxed as ordinary income.