Charitable giving is a great thing to do regardless of whether or not you are able to realize a tax benefit. However, if you can help others and realize a tax benefit this is a good thing and might even allow you to give a little bit more. Here are some things to know in trying to maximize the tax benefits of charitable giving.
The standard deduction is a reduction in taxable income available to all taxpayers regardless of whether or not they can itemize deductions or have any tax credits. For 2022, the standard deduction is:
If you have itemized deductions in excess of the standard deduction, you can deduct that amount from your taxes. Examples of itemized deductions include:
Charitable contributions can be made in a number of ways that can qualify as an itemized deduction. These include:
The amount that can be deducted as an itemized deduction is as high as 60% of adjusted gross income for some cash donations, dropping to 50% or as low as 20% for other types. This percentage can also vary by the type of organization.
With the caps on the ability to itemize state and local taxes in place due to the SALT provisions in the tax code, charitable giving can offer a larger tax break while doing good for others.
Here are some strategies for maximizing the tax benefits of charitable giving.
If you have trouble itemizing deductions in most years, it can make sense to bunch several years’ worth of charitable contributions into a single year. If you can, calculate the amount you would normally give to charity over a period of maybe 3-5 years and bunch those contributions into one year. This can help you to be able to itemize and take the maximum deduction for these contributions. You might tie this into a year where your income is higher than normal, if applicable.
If the organization accepts them, gifts of appreciated securities like stocks, mutual funds and ETFs can offer a double benefit. First, the market value of the securities on the date they are transferred to the charity is the value of the gift and can be used as an itemized deduction.
Additionally, this method will eliminate any capital gains taxes that would be incurred if the securities were sold first and the cash proceeds were then donated. This is a very tax-efficient way to make charitable gifts. This can be an excellent strategy as part of the portfolio rebalancing process if some shares would have been sold anyway.
Whether it’s a piece of real estate, art, collectibles, or other assets, some organizations will accept these as gifts as well. You will generally need an appraisal of the asset to establish a value for the donation. This can be a solid alternative versus trying to sell the asset in the open market, waiting for a willing buyer, and having to pay any applicable capital gains taxes.
A donor-advised fund is essentially a charitable investment account. A number of custodians offer DAFs. Contributions to the donor-advised fund qualify for a tax deduction in the year they are made. The money is then invested and the account holder can make donations to qualified organizations over a period of years.
Gifts can be made as cash, appreciated securities, or in some cases assets such as real estate, art, and other hard assets. Donor-advised funds will generally charge an asset management fee.
QCDs are only available from a traditional IRA and you must be at least age 72 to use this tactic. Traditional IRA account owners can donate up to $100,000 from their accounts each year using this method. Donations must be made to a qualified charitable organization.
While QCDs are not eligible for itemization as a tax deduction, they offer a number of advantages. First, there are no taxes on the distribution from the IRA. For those who are 72 and over, the QCD can serve the dual purpose of providing a way to make charitable contributions and satisfying some or all of their required minimum distribution (RMD) amount as long as certain rules are followed.
QCDs must be made directly to the charitable organization. Often the IRA custodian will do this by issuing the account holder a check made payable to the charitable organization, which the account holder will then forward on to the charity.
For those who are at least 72, it can make sense to do QCDs in the two years prior to hitting the age for RMDs as a way to give money to the organizations of their choosing and reduce the amount of future RMDs.
Donating to charity is a good thing, a way to help others and to further the causes that you believe in. If you follow certain rules, you can do this in a way that provides a tax break, making the net cost of the donation a bit lower.
For help in determining the most tax-efficient method of supporting the organizations that are important to you, please give us a call. As both financial and tax advisors we can help you design the most tax-efficient giving strategy for your situation.
Bill Canty, CFP®, CPA
Ed Canty, CFP®
Joe Canty, Investment Advisor Rep.
Maureen Walsh, EA, Investment Advisor Rep.
Tina Alteri, CPA, Tax Advisor