Year-End Charitable Giving Opportunities

By Osborn Williams & Donohoe on October 25, 2023

For most of our clients, taxes are not the most enjoyable subject to think or read about – with perhaps one exception: taxes and philanthropy. In fact, we find it is difficult not to be excited about the opportunity to both reduce taxes and make a positive impact.

Here are some ideas to consider as we approach year end and embrace the joy of giving.

• Gifting appreciated stock or other non-cash assets to charity:
  
  This strategy allows you to eliminate the capital gains tax you would need to pay when you eventually sell the appreciated asset, in addition to providing a deduction (if you itemize) equal to the fair market value of the asset when you donate it. Note that a deduction limit of 30% of your adjusted gross income (AGI) ― or 20% if gifting to a private foundation ― applies to these types of donations, whereas most cash donations have a higher 60% limit. However, you can carry over the deduction for five tax years, should it exceed the limit.

Important note: The above example is for illustration purposes only. Please consult a tax advisor to understand the implications of this strategy based on your particular situation.
*Assumes donor’s AGI exceeds $150,000 and therefore that the charitable deduction for the donation does not exceed 30% of the donor’s AGI.

• If you are 70 ½ or older, making a qualified charitable distribution (QCD) from your IRA:
  
  A QCD is an otherwise taxable distribution of up to $100,000 from an IRA to a qualified charity.[i] This distribution counts toward your required minimum distribution (RMD) and is excluded from your taxable income, even if it exceeds your RMD. Depending on your unique situation, making a QCD may even allow you to remain in a lower tax bracket and avoid the 3.8% net investment income tax on capital gains, interest and other investment income, applicable to taxpayers above certain modified gross adjusted income thresholds (e.g., $250,000 for married couples in 2023). This strategy is especially beneficial to taxpayers who are claiming the standard deduction as it reduces taxable income while still allowing the same standard deduction and may be less advantageous for taxpayers who are currently itemizing.
  
  It is also important to note the following:
  • Using RMDs, which begin at age 73, for QCDs is often advantageous.
  • QCDs can not be made from employer-sponsored retirement plans such as 401(k)s and 403(b)s
  • QCDs can not be made to private foundations, supporting organizations or donor-advised funds.
  • The timing of QCDs is important so as not to inadvertently generate taxable income. For example, if you were to take a $15,000 RMD early in the year and then toward year end make a $15,000 QCD, the $15,000 QCD will not offset the RMD you made earlier in the year; the IRS would treat the first $15,000 as taxable income.
  • You must inform your tax advisor when you make a QCD, as the standard 1099-R tax document provided by IRA administrators does not distinguish between the types of withdrawals made.

• Bunching charitable gifts:
  
  Bunching charitable gifts (combining multiple years’ donations into one year) — perhaps through a donor-advised fund, itemizing deductions the year you bunch, and taking the standard deduction in years you don’t bunch — could make sense. This is particularly the case in situations where there is a relatively small tax liability difference between taking the standard deduction and itemizing your deductions.

Important note: The above example is for illustration purposes only. Please consult a tax advisor to understand the implications of this strategy based on your particular situation.
*Please note that limits on itemized deductions exist for high-income taxpayers. Please consult your tax advisor for more details. 

• Contributing to a donor advised fund (DAF):
  
  A DAF is an account or fund, owned by a sponsoring organization, to which you make charitable contributions. The sponsoring organization manages the DAF’s investments and distributions. The potential benefits of a DAF include relative ease (since the sponsoring organization manages it), simplified record-keeping for tax reporting, privacy, and flexibility on when, if and to which organizations to make donations.

• Funding a charitable trust:  
  
  Establishing a charitable trust may help you achieve multiple goals, including balancing your charitable goals with your income needs and/or providing potential tax deductions. There are two main types of charitable trusts that you can consider with your advisors — charitable remainder trusts (CRTs) and charitable lead trusts (CLTs). Both types of trusts involve gifting assets to a trust, after which regular payments from the trust are either made to a noncharitable beneficiary (CRT) or charitable beneficiary (CLT) until the end of the trust’s term, at which point remaining assets are paid to a charitable beneficiary (CRT) or noncharitable beneficiary (CLT).
  
  CRTs look particularly attractive in the current environment, because one of the main benefits of the strategy ― the tax deduction you can potentially take when funding the trust ― becomes larger at higher interest rates (i.e., the Section 7520 interest rate used to calculate deductions has risen to 5% from just 1% two years ago).
  
  Both vehicles can benefit individuals and families who have significant charitable intentions, but they require careful planning and a full appreciation of the risks associated with them.

A Year-End Plan for You

The above techniques, and other tax planning strategies, require careful, skilled consideration. Please reach out to us, and we can coordinate a custom, year-end plan with your accountant, tax attorney and any other advisors.

[i] A qualified 501(c)(3) organization (a charitable organization eligible to receive tax-deductible contributions).