As the year draws to a close, it’s time for you to take advantage of the potential tax benefits of charitable giving. Although you could potentially lessen your tax liability through charitable giving, nonprofits perform invaluable work within our communities and depend on the support of donations.
According to the 2023 Bank of America Study of Philanthropy, the average amount donated by individuals to charity in 2022 was up 19% from pre-pandemic levels1, however GivingUSA.org found that the total amount of charitable giving fell by 3.4% last year – a 10.5% decrease when adjusted for inflation. Nonprofit organizations, especially those that rely on charitable donations to support their day-to-day operations, may continue to be impacted by the growing costs of goods and higher interest rates.
In this article, we will explore four strategies for year-end charitable giving that can help you support your favorite causes while potentially reducing your tax liability.
1. Contribute to a donor-advised fund (DAF):
Donor-Advised Funds (DAFs) are versatile charitable giving tools that offer flexibility in managing your contributions. A DAF is sponsored by a public charity. It allows you to receive an immediate tax deduction in the year you contribute the funds and recommend grants from the fund to your chosen charities over time. It’s also a good option if you’re unsure which charities you’d like to support but know you’d like to make a charitable donation.
You can incorporate a DAF into your estate planning, making it easier to continue charitable giving for generations to come. This can help you continue your charitable giving legacy, so you pass on values, not just valuables.
2. Gift long-term appreciated securities:
Instead of selling appreciated stock, donate it directly to a qualified charity. Donations made by cash or check are the most common methods of charitable giving, however donating appreciated securities can provide significant tax advantages. You generally don’t have to pay capital gains tax on the appreciated value and you can receive a tax deduction for the full fair market value of the stock.
Deductions for appreciated property held for one year or less are typically limited to the cost basis of the securities. For contributions to 501(c)(3) public charity organizations, donations of securities with long‐term appreciation are usually limited to 30% of your adjusted gross income (AGI). Except for qualified conservation contributions, you may be able to deduct the excess in each of the next five years until it is used up, but not beyond that time.2
3. Give cash
The temporary Coronavirus Aid, Relief, and Economic Security (CARES) Act (2020) allowed donors to get a Federal income tax deduction for charitable contributions of up to 100% AGI. However, the current deduction for cash gifts (in most cases) is limited to the standard 60% limit 3. Even at the 60% limit, donating cash is straightforward and still offers valuable tax deductions.
Cash donations are easy to make and are a simple and effective way to support your favorite causes. Although you won’t get a tax deduction, you may also take advantage of the 2023 annual gift exemptions by giving up to $17,000 to a family member or friend ($34,000 per married couple) without tax implications.4
4. Make a qualified charitable distribution (QCD):
QCDs are designed specifically to assist retirees in making tax-efficient charitable donations.5 Currently, if you’re 70½ or older, you can make direct charitable donations from your Traditional IRA, up to $100,000 annually ($200,000 per married couple).
The SECURE Act 2.0 has made QCD more attractive because the $100,000 limit will be indexed for inflation beginning in 2024, potentially helping you save more in taxes. QCDs can also satisfy your required minimum distribution (RMD) requirements if you are over age 73 or turn 73 on or after January 1, 2023 per the SECURE Act 2.0.6
FCA Corp is here to help you
While there are various strategies for year-end charitable giving, each individual and circumstance is unique so it’s important to consult your legal or tax professional and your FCA Corp advisor before making any decision. With the right approach, your charitable giving can become a powerful tool for reducing your tax burden while making a positive difference for years to come.
Contact FCA Corp today to get started.
Sources
- https://www.wealthmanagement.com/philanthropy/charitable-giving-has-bounced-back
- https://www.irs.gov/publications/p526#en_US_2022_publink100017780
- https://www.irs.gov/charities-non-profits/charitable-organizations/charitable-contribution-deductions
- https://turbotax.intuit.com/tax-tips/estates/the-gift-tax/L1sFpFeXV
- https://www.irs.gov/newsroom/reminder-to-ira-owners-age-70-and-a-half-or-over-qualified-charitable-distributions-are-great-options-for-making-tax-free-gifts-to-charity
- https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
