If you’re a senior citizen looking to lower your taxes and donate to charity, you’re in luck. Two established tax strategies can help you achieve this goal with the IRS for the 2024 tax year. There is no way around the fact that you have to file your taxes (by April 15 this year), but being able to save while helping others out is just financial gravy.
“Both qualified charitable distributions (QCDs) and donor-advised funds (DAFs) are great tax strategies for people to use to both help others and save in taxes,” said Dave Flegal, CPA, CFP, founder and financial planner at Flegal Financial Planning.
He said these strategies are important, because many people don’t get a tax deduction for their charitable giving, due to standard deductions being so high — $14,600 for single and $29,200 for married filing jointly. Therefore, he said he frequently utilizes DAFs and QCDs with his clients, as a way to help them achieve both their charitable giving and tax savings goals.
If you’re interested in helping others and lowering your tax burden, one — or both — of these options could be a good choice for you and your itemized deductions. Keep reading to learn more about DAFs and OCDs.
“A DAF is like a charitable investment account for the sole purpose of supporting charitable organizations you care about,” Flegal said. “When you contribute cash, securities or other assets to a donor-advised fund, you are generally eligible to take an immediate tax deduction.”
He said the funds you allocate to a DAF can be granted to any eligible IRS-qualified public charity. With taxes filed, retirement plans funded and donations given, seniors are really being the best they can be this calendar year.
“Unlike the QCDs, the funds you would use to fund the DAF need to come from cash or investments from a bank account or brokerage investment account — after tax,” he said.
He said this strategy can be beneficial for seniors with large investment gains in after-tax brokerage accounts.
“Clients can gift these funds to the DAF, receive a tax deduction for the fair market value of the investment and avoid paying tax on any of the gain,” he said. “This strategy has the potential save seniors a lot in taxes.”
However, he said this approach typically only makes sense if you’re planning to give multiple years’ worth of charitable donations in one year, then give from the DAF for multiple years in the future.
“In summary, giving to a DAFs can be great for someone with large investment gains in an after-tax brokerage account,” he said.
“Qualified Charitable Donations are a great option for seniors who are required to take distributions [required minimum distributions] from traditional IRA or 401(k) accounts based on their age — age 70.5 to 73-plus based on their year of birth,’” said Heather Comella, CFP, founder and lead planner Folsom Wealth Advisors. “These distributions are subject to ordinary income tax rates, and large RMDs can push seniors into high tax rates based on the tiered tax system.”
She said a QCD allows seniors to satisfy their RMD with funds from their retirement account by making a seamless contribution to charity, which is a magnanimous form of tax credit and deduction when you file your return.
“Now, you can’t make a QCD directly from your 401(k) account, but you can roll over your funds to an IRA and then make a donation,” she said.
There are just a few simple steps to follow.
“You can contact your IRA account custodian to request a QCD be sent directly from your IRA account to your preferred charity,” she said. “However, in order for this to satisfy your annual RMD amount, you’ll need to initiate the QCD before you initiate any distributions to satisfy your RMD for the year.”
She said the charity must also be a qualified 501(c)(3) organization.
“Using a QCD to satisfy part of your RMD requirement means the amount is never added to your taxable income, therefore reducing your annual tax liability in the year the QCD was made.”
If you’re a senior in a high tax bracket who doesn’t need your IRA, this can be a particularly powerful strategy, said Peter Ankeny, CFP, founder of Wolf Pine Capital.
“When you make a QCD, you can transfer up to $105,000 directly from your IRA to charity in 2024, completely bypassing your taxable income,” he said. “This is especially valuable, because it reduces your adjusted gross income (AGI) rather than just providing a deduction, which can help minimize taxes on Social Security benefits and reduce Medicare premiums.”
“The decision between these strategies often comes down to your income sources and asset composition,” Ankeny said. “If you’re in a high tax bracket and don’t need your IRA distributions for living expenses, QCDs are usually the better choice because they directly reduce your taxable income.”
However, he said this isn’t always the case no matter your filing status or tax bill.
“If you’re sitting on highly appreciated securities like tech stocks that have seen massive gains, a DAF might be more advantageous,” he said. “Especially since it gives you the flexibility to spread your actual charitable giving over multiple years, while taking the deduction immediately.”
Ultimately, he said the benefits of both strategies extend beyond those of simple cash donations. This is because they can significantly reduce your overall tax burden, while allowing you to support causes you care about.
“The main difference is that QCDs work best as an income management tool, while DAFs excel as an asset management strategy,” he said. “For optimal results, many of our clients actually use both — QCDs for their annual giving and DAFs for strategic giving of appreciated assets.”
He said this combination can offer maximum tax efficiency while providing you with giving flexibility.
