You've worked for decades to build your wealth. Now, as you consider your estate plan, you're torn between supporting the causes you believe in and minimizing the tax burden on your heirs.
At Ruggiero Law Offices, our Paoli estate planning lawyers understand that charitable giving is about more than just tax benefits; it's about creating a meaningful legacy that reflects your values. Our team helps clients throughout Pennsylvania develop thoughtful giving strategies that support worthy causes while providing valuable tax advantages.
Understanding Pennsylvania Taxes for Charitable Donations
Pennsylvania's tax treatment of charitable giving differs from federal tax laws in several important ways. When you donate to qualified charities, you'll find advantages at both levels, but the specifics vary.
Income Tax Deductions
Pennsylvania does not impose a state income tax deduction for charitable contributions, unlike the federal government. This means that while you can claim deductions on your federal return, your state income tax liability won't be directly reduced by your charitable gifts.
Inheritance Tax Implications
Pennsylvania is one of the few states with an inheritance tax, which ranges from 0% to 15%, depending on the beneficiary's relationship to you. When you leave assets to qualified charitable organizations in your will or trust, those assets avoid the Pennsylvania inheritance tax entirely, potentially saving your estate thousands of dollars that would otherwise go to the state.
Lifetime Charitable Giving Strategies for Pennsylvania Residents
Making charitable gifts during your lifetime offers immediate tax benefits while allowing you to see the impact of your generosity firsthand.
Bunching Charitable Donations
The Tax Cuts and Jobs Act nearly doubled the standard deduction, making it harder for many taxpayers to benefit from itemizing their charitable donations. Bunching involves consolidating two or more years of planned charitable giving into a single tax year.
For example, if you normally donate $10,000 annually to your favorite charity, you might choose to donate $20,000 in 2023 and nothing in 2024. This approach helps you exceed the standard deduction threshold in alternating years, maximizing your federal tax benefits.
Qualified Charitable Distributions from IRAs
If you're at least 70.5 years old, you can make qualified charitable distributions (QCDs) directly from your IRA to eligible charities, up to $108,000 annually. QCDs count toward your required minimum distributions (RMDs) once you reach age 73, but unlike regular RMDs, these distributions aren't included in your taxable income.
This effectively creates a tax deduction even if you don't itemize deductions on your federal return. Also, by lowering your federal adjusted gross income, QCDs may help reduce the taxation of your Social Security benefits and potentially lower your Medicare premiums.
Donating Appreciated Assets
Donating appreciated assets like stocks or real estate that you've held for more than a year offers powerful tax advantages compared to selling the assets and donating the proceeds. When you donate appreciated assets directly to charity, you avoid paying capital gains tax on the appreciation.
Advanced Charitable Planning Vehicles for Pennsylvania Residents
For those with substantial assets or specific philanthropic goals, more sophisticated charitable planning tools can provide significant tax advantages while creating lasting impact.
Donor-Advised Funds for Flexible Giving
A donor-advised fund (DAF) functions like a charitable investment account, providing an immediate tax deduction when you contribute while allowing you to recommend grants to charities over time.
When you contribute to a DAF, you receive a federal income tax deduction in the year of the contribution of up to 60% of your adjusted gross income for cash donations and 30% for appreciated assets. The funds can then grow tax-free before being distributed to your chosen charities.
Charitable Remainder Trusts for Income and Giving
A Charitable Remainder Trust (CRT) allows you to contribute assets to an irrevocable trust that provides income to you or your beneficiaries for a specified period, with the remainder going to your chosen charity.
When you fund a CRT, you receive an immediate partial tax deduction based on the present value of the remainder interest that will eventually go to charity. CRTs are particularly effective for highly appreciated assets. For example, if you fund a CRT with $500,000 in appreciated stock that you've held for decades with a cost basis of $100,000, you would avoid paying immediate capital gains tax on the $400,000 appreciation.
Charitable Lead Trusts for Legacy Planning
A Charitable Lead Trust (CLT) essentially reverses the structure of a CRT. It provides income to charity for a specific period, with the remaining assets eventually passing to your non-charitable beneficiaries.
CLTs can be particularly valuable for wealthy Pennsylvania residents who want to transfer assets to the next generation with reduced gift or estate taxes. The charitable income interest generates a partial gift tax deduction, potentially allowing you to transfer assets to family members at a reduced tax cost.
Incorporating Charitable Giving into Your Pennsylvania Estate Plan
Thoughtful integration of charitable giving into your estate plan requires balancing your philanthropic goals with your family's needs and tax considerations. Your will or trust can direct specific assets or a percentage of your estate to charitable organizations.
For Pennsylvania residents, charitable bequests reduce the taxable estate for inheritance tax purposes. Directing assets to charity can result in significant tax savings. For example, if you leave $100,000 to a niece or nephew, they would owe $15,000 in Pennsylvania inheritance tax. By leaving that amount to charity, the entire $100,000 goes to support causes you care about rather than being reduced by taxes.
Getting Professional Guidance on Charitable Giving
Effective charitable planning requires understanding both state and federal tax laws and how they interact with your overall financial picture. Working with knowledgeable professionals ensures your giving strategy aligns with your goals.
Our Paoli and Center Valley estate planning lawyers can help you evaluate which charitable giving vehicles best suit your situation. We'll consider factors such as your income level, the types of assets you own, your charitable objectives, and your family's needs. We can also coordinate with your other advisors, including financial planners and accountants, to create a cohesive strategy that maximizes both tax benefits and charitable impact.
Regular reviews of your charitable giving plan are essential as tax laws change and your personal circumstances evolve. We recommend revisiting your charitable strategy whenever major life events occur or tax laws are modified.