Year-end Charitable Gifting Strategies
Every New Year’s Eve, my uncle Chris used to sit down at his desk and write checks to the charities he supported in order to be able to deduct them on his tax return that year. While this may not sound like the definition of fun for most people while welcoming the New Year, he was a CPA who specialized in serving non-profits, so it was very fitting for him.
If Chris were still here, I would love to talk with him about charitable gifting strategies. (And yes, I fully realize the boringness of my last sentence.) With the Tax Cuts and Jobs Act (TCJA) passed in late 2017, many things have changed about how to support charities in a tax-efficient manner. The days of writing checks on December 31st may no longer be the best option.
As many people generously open up their wallets today on Giving Tuesday, here are four strategies to consider:
Qualified Charitable Distributions (QCDs)
If you are over age 70.5, this is likely the most beneficial way for you to support any non-profits. QCDs are a gift made directly from your IRA to a qualifying charity.
QCDs are so advantageous because the distribution does not count as income to you. So even if you take the standard deduction, you essentially still get the tax benefit of the deduction since you are using pre-tax funds to make a charitable gift. Even better, QCDs reduce what’s called your modified adjusted gross income (MAGI), which is used to calculate Medicare’s income-related monthly adjustment amount (IRMAA) premiums. This means you may be able to help avoid additional Medicare premiums through this reduction in income.
Note that when you receive a Form 1099-R for the distributions, it will not be coded as a QCD. You will need to make this adjustment when you file your tax return, or tell your tax preparer, to ensure the income is not included.
Also note that to qualify, you cannot have the check made out to you and then give it to charity. The check must be made out to the charity when your custodian processes the distribution, although you typically get a choice to mail it directly to the charity or to your home address, where you then have the option of hand delivering or mailing the check to them.
QCDs are limited up to $100,000 per year for 2023.
Gifting Appreciated Stock
If you’re not close to age 70.5 yet, another strategy to consider is gifting appreciated stock directly to a charity. The benefit of this strategy is that not only does it count as a charitable gift for tax purposes, but you also don’t have to pay any taxes on the appreciation of the stock. So if you purchased a stock for $1,000, it grew to $10,000 and you gifted it all to charity, the full $10,000 would be deductible as an itemized deduction and the $9,000 of unrealized gains would not be taxable to you. It’s a win-win.
Gifting appreciated stock is limited to up to 30% of your adjusted gross income (AGI), with a carryforward of up to 5 years if you exceed this threshold.
People with little to no mortgage interest typically now take the standard deduction unless they give large amounts to charity each year or have high medical expenses, given that state and local income taxes are capped at $10,000 per year.
In this situation, one of my favorite strategies is to lump charitable contributions together for multiple years. This may be enough to allow you to itemize deductions, so you can get at least some tax benefits for the charitable gifts in the year you lump them together, and then fully utilize the currently higher standard deduction in the others.
Charitable lumping can also be advantageous if you’re temporarily in a high income tax bracket now and may not be next year, meaning a tax deduction may save you more now vs. later.
Donor Advised Funds
Want to combine both of the strategies above? Donor Advised Funds (DAFs) can be a great option.
A DAF is an account that is no longer your asset, but which you have authority to grant gifts to charity. For tax purposes, the charitable gift is made at the time you make a donation to the fund. Once the account is funded, you have the option to either gift that money directly to charity, invest it, or both. While you can’t take that money back for personal use, there currently is no annual minimum gift amount and the funds carry forward to future years, similar to a health savings account (HSA). And even if you don’t gift all of the funds before you pass away, you can name charities as beneficiaries and/or name a successor owner of the account to make gifts on your behalf.
Gifts of appreciated stock to a DAF can be an ideal way to fund them. It allows you to make a large contribution in one tax year (charitable “lumping”) while also allowing you to gift those funds to charity over a longer time period.
DAF’s can also be great to use if you’re trying to support a smaller charity that may not be able to accept stock gifts. Since the charities receive a check for any grants you make, any charity with a checking account should be able to accept the funds.
As you consider which charities you wish to support between now and the end of the year, be sure to consider the best way to support them. With the potential tax savings, you may be able to give them even more than you originally planned.
About the Author
Michael T. Powers, CPA, PFS, CFP® (Mike), is a flat fee-only financial planner based in Richmond, VA serving clients virtually nationwide. He has been fortunate enough to help hundreds of people successfully retire over his career. As a CPA, being tax efficient in financial decisions is always on his mind.
Photo by Katt Yukawa on Unsplash.
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