Learn How to Make the Most of Your Giving
The end of the calendar year often brings an inundation of requests for year-end charitable giving from many worthy nonprofits. Given such requests, and the fact that tax season is on the near horizon, many people begin to think about the causes they care about and how to give back. Last year 64% of Americans donated to charity, the largest source of giving in 2022. While overall charitable giving saw a decline, for those individuals who do choose to keep on making gifts that help make a difference in the lives of others there are several effective charitable strategies that can provide helpful tax benefits. Read on and consider the following five year-end charitable giving strategies.
Year-End Charitable Giving Strategy 1. Bunched Donations
The Tax Cuts and Jobs Act reduced the number of taxpayers who itemize their deductions by significantly increasing the standard deduction. For those who participate in year-end charitable giving, it makes it difficult to benefit from such itemized deductions. In 2023 the standard deduction is $13,850 for single taxpayers and $27,700 for married couples. With this, your charitable deductions would have to be above this threshold to benefit from itemizing.
To overcome this challenge, you may want to consider ‘bunching’ multiple years of charitable donations into one tax year if your current deductions are below the standard threshold. This strategy allows you to consolidate your donations for two years into a single year to maximize your itemized deductions for the year you make your donations. In subsequent years, you can take the standard deduction, which will benefit your overall tax efficiency.
Year-End Charitable Giving Strategy 2. Donate Appreciated Assets Other than Cash
Consider donating highly appreciated assets that have been held longer than one year. This strategy has the potential to maximize your charitable contributions while minimizing your tax liability. In general, capital gains tax can be avoided on these assets if you donate them to the charity directly, as opposed to selling and then donating the proceeds. This approach could benefit both you and your chosen charity, as it can increase the overall donation amount to the nonprofit while increasing your charitable tax deduction.
Some examples of non-cash assets include:
- Publicly traded securities
- Real Estate
- Fine Art
- Privately held business interests
There are certain non-cash assets that require an appraisal before the charitable deduction is allowed by the IRS. Working with a trusted financial advisor can help ensure you are getting the most benefit from your year-end charitable gift.
Year-End Charitable Giving Strategy 3. Donor-Advised Funds
A donor-advised fund (DAF) is a giving account that is established at a public charitable foundation. It allows you to make a charitable contribution, receive a tax deduction, and then recommend grants from the fund to the charities of your choice over time. This can be helpful if you know you want to give to a charity this year but aren’t sure which to choose. Contributions to DAFs must be made by December 31st to qualify for a current year’s charitable deduction.
Year-End Charitable Giving Strategy 4. Utilize Qualified Charitable Distributions
Generally, a qualified charitable distribution (QCD) is another charitable giving strategy that provides a distribution of up to $100,000 from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is at least 70½ years old. The donation is paid directly from the IRA to a qualified charity counts towards your required minimum distribution (RMD) and is not considered taxable income. If you must take an RMD that you won’t need to cover your expenses, a QCD can allow you to donate to a charity that you care about while reducing your overall tax liability. If you are married and your spouse also has a traditional IRA, they can also direct an amount of their RMD towards a charitable cause.
SEE ALSO: Preparing Your Finances for the New Year
Year-End Charitable Giving Strategy 5: Set Up a Charitable Remainder Trust
Charitable remainder trusts (CRT) are complex, and they aren’t ideal for everyone. However, they can have useful advantages if you have significant assets and want to leave a portion of those assets to charity. The CRT enables you to pursue philanthropic wishes while still generating income and benefiting from current-year tax benefits. They are set up with a donation of highly appreciated or income-producing assets to an irrevocable trust by the grantor. The grantor of the CRT names a non-charitable beneficiary for a specified period of time, after which the remainder of the trust is donated to one or more designated charities of choice. Because the final designated beneficiary of the assets is charitable, the grantor receives a charitable tax deduction at the time that the trust is funded. CRTs are specifically designed to reduce taxable income, but you’ll likely want to work with a financial professional due to the complexity of this tool.
Can We Help You Maximize Your Year-End Charitable Giving Strategy?
Are you looking for ways to maximize your charitable impact while reducing your tax liability? At Andersen, we believe that working with a qualified financial advisor is a great first step in optimizing your charitable giving strategy. As the year winds down, we are here to help you make the most of your philanthropy and give back in ways that are meaningful to you. To learn more about how we can help, reach out to us today!