The program year is already in full swing, and soon enough, you will be wrapping up another year of ministry. Now is the time to consider how you will engage your donors during this important giving season by encouraging tax-advantaged giving.
It is true that reducing tax liability is not a primary motivator for giving. However, today’s donors are savvy about leveraging their contributions to take advantage of tax deductions. Promoting tax-advantaged giving can help your donors maximize their gift to your church and provide substantial year-end funding for your important ministries.
What are some of the primary ways donors can leverage their gifts and avoid unnecessary taxation?
Donor-Advised Funds (DAFs) have grown in popularity and provide a tax-advantaged way for your members to contribute. A DAF allows donors to make irrevocable contributions to their fund and deduct it from taxable income in the year in which the donation was made. Many financial institutions, community foundations, and denomination foundations can be used to set up a DAF. The DAF is invested in the market, and the interest and income are non-taxable. The donor may continue to contribute to the DAF and recommend grants, or distributions, from the fund at any time.
Grants, or distributions, may be made to any organization that is classified by the IRS as a tax-exempt charitable organization. The number of DAF accounts in the United States now exceeds one million. In 2020, grants from DAFs increased 27% over 2019, representing the highest growth rate in the past ten years. In 2020, grants from DAFs totaled almost $35 billion.
With the exponential increase in the number of DAFs, it is highly likely you have DAFs account holders in your church. Donor-Advised Fund holders are often unclear about their ability to fulfill a pledge to your church through a DAF grant. While grants from a DAF cannot be used to fulfill a “contractual obligation or pledge” or pay for things like tickets to a charitable event, church pledges are almost always nonbinding and, therefore, may be fulfilled using a DAF. Using terms such as “estimate of giving” or “giving intention” rather than “pledge” or “commitment” can provide clarity and resolve any potential confusion.
Remember, all funds deposited into a DAF must be given to charity. Donor-Advised Funds must either be passed on to other advisors upon the fund holder’s death or given to a nonprofit beneficiary. Becoming the beneficiary of a member’s DAF is another way for the church to diversify revenue streams and support annual ministry.
Donor-Advised Fund account holders have chosen to prioritize philanthropy. Many have accumulated significant resources that can only be used to support a charitable cause. Knowing your DAF account holders and their philanthropic passions provides an opportunity to build relationships and engage them in meaningful ways.
IRA REQUIRED MINIMUM DISTRIBUTION
The rules around IRA gifts have shifted, but the benefits of contributing to the church from an IRA remain intact. For those aged 70 ½ or older, it is possible to make tax-favorable charitable gifts (known as a Qualified Charitable deduction or QCD) to churches and other charities. Donors can transfer up to $100,000 per year free from federal income taxes. There also may be state income tax savings.
For those 72 and older or those who have begun taking their Required Minimum Distribution (RMD), donations given in this way count toward their RMD for the year of the gift. Using some or all of the RMD to make contributions is a tax-advantaged way to support your church’s ministry and mission. In order to take advantage of these tax savings, donors must make the donation directly from the IRA to the church. For those with check-writing privileges on their accounts, this may be the most efficient way to make these types of gifts.
Donors who have inherited an IRA from someone other than their spouse must liquidate the IRA within ten years of inheritance. Liquidating an IRA creates a taxable event usually subject to ordinary income and subject to state income taxes. Therefore, a gift to the church directly from this type of IRA can provide a win/win opportunity for the donor and your church.
An increasing number of church members are discovering the benefits of contributing to the church directly from their retirement accounts and the financial advantages of this form of giving. Your donors will thank you for helping educate them on these powerful tax benefits.
Gifts of appreciated assets have long been an important way for donors to make tax-advantaged contributions to the church. To avoid capital gains tax, gifts of appreciated assets must have been held by the donor for at least one year and must be given directly to the church. For purposes of tax deduction, the donor receives credit for the value of the stock on the day the transfer is complete. Remind your donors about your ability to accept this form of donation and make the transaction as simple and transparent as possible. The stock market may be down from its high in early 2022, but most investors have seen incredible gains over the last ten years on which they now face capital gains taxation.
As the fall season approaches, donors will be making plans for their year-end contributions. Be sure to remind donors about all the ways in which they can continue to provide support to your ongoing ministries through tax-advantaged giving. Encouraging your donors to lessen their tax liability and increase their support for your church provides a winning combination.
Horizons is here to help. If you have questions or need a conversation partner, please visit horizons.net and let us know how we can help.