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Give smarter: Tax-effective strategies for charitable donations

November 15, 2023 Article 4 min read
Jaime Eckels Wealth Management
As we head into the end of the year and thoughts turn to charitable giving, understand how to optimize donations to leverage tax-effective strategies for your financial situation. We share three approaches.
Two wealthy people reviewing their charitable donations.Charitable giving not only allows us to support causes close to our hearts but also drives meaningful and positive change in the world through our collective efforts, regardless of the size of the donation. As we head into the end of the year, it’s important to revisit your charitable intentions and understand how to optimize gift giving and leverage tax-effective strategies best suited to your personal situation.

The Tax Cuts and Jobs Act (TCJA) of 2017 had a notable impact on charitable giving. The TCJA’s near-doubling of the standard deduction for joint-filing married couples meant that many families were no longer getting a tax benefit for giving to charity since they were no longer itemizing. As a result, charitable giving has declined significantly; families are more likely to give if they get some “bang for their buck” from a tax perspective.

As tax laws evolve, so do strategies for optimizing the financial impact of philanthropy. With a little creative planning, families who are charitably inclined can structure charitable giving so that it has a meaningful impact on both the charity and their personal tax situation.

As tax laws evolve, so do strategies for optimizing the financial impact of philanthropy.

Let’s walk through three tax strategies for individuals and families to help make the most of charitable giving:

1. Bunch your charitable donations

The concept of “bunching” has been around for a long time but has gained more traction recently because of the increased standard deduction and the difficulty many taxpayers have getting over that higher tax hurdle. Bunching allows taxpayers to optimize donations by strategically timing and consolidating them to achieve greater tax benefits. Taxpayers should consider bunching two years’ worth of donations into a single tax year and giving every other year rather than donating the equivalent amount annually.

Consider a family that has potential deductions of $10,000 in mortgage interest payments, $10,000 in property taxes, and wants to give $7,000 to charity. On an annual basis, the family wouldn’t have enough deductions to break through the standard deduction threshold ($27,700 for 2023) and so would get zero tax benefit for their cash donations. By bunching two years’ worth of their $7,000 charitable donations into the same tax year, they would exceed the standard deduction level by $6,300. As a result, the family could reduce its taxable income by that amount. The family would then abstain from donating the following year and just take the standard deduction.

2. Make charitable donations from your IRA

For individuals 70 ½ years or older, qualified charitable distributions (QCD) are another powerful tool that can be used for charitable giving, especially for those who are required to take a minimum distribution from their IRA each year.

These distributions, which were made permanent in 2015 as part of the Protecting Americans from Tax Hikes (PATH) Act, allow retirees to avoid paying income tax on distributions of up to $100,000. The advantage of a QCD is that the distribution from the IRA goes directly to charity and that amount isn’t considered a taxable distribution. Normally, any distribution from an IRA is considered ordinary income and taxed at the individual’s or family’s top marginal tax bracket. An added benefit of a QCD strategy is that it’s considered an “above-the-line” deduction and reduces the adjusted gross income (AGI) of someone taking required minimum IRA distributions. A reduced AGI is powerful because it drives the cost of Medicare premiums, taxability of Social Security benefits, and much more.

The advantage of a QCD is that the distribution from the IRA goes directly to charity and that amount isn’t considered a taxable distribution.

3. Donate appreciated securities

Even with the market volatility we’ve seen over the last couple of years, it’s likely most investors own individual stocks or mutual funds in their brokerage account that have appreciated significantly over time. If you were to sell that stock to generate cash for your charitable gifts or even for portfolio diversification purposes, the gains would be subject to capital gains tax. Instead, consider donating an equivalent amount in stock and avoid capital gains tax altogether. Neither you nor the charity are on the hook for the tax bill. Keep in mind that a security must generally be held for longer than one year in order for its donation to entitle you to a charitable deduction equal to the fair market value of the donated security.

This strategy takes a little more planning than simply delivering a check. You must make sure that the charity has a brokerage account and is able to accept the asset you plan on transferring. You then have to set up a transfer of the security in-kind to the charity’s brokerage account. It often takes up to a week for this type of transfer to complete. The process isn’t difficult, but it shouldn’t be an exercise you leave until mid-December if you’re trying to complete the gift by year-end.

If you’re charitably inclined, you’ve likely put a lot of thought into what causes matter most to you and how much you want to donate to them annually. Go one step further and evaluate the diverse methods for optimizing your charitable giving each year. Proper planning is essential, and it’s important to work with a qualified tax professional or financial advisor to determine if any of these methods align with your tax situation and personal financial plan.

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