Year-End Charitable Giving: 5 Strategies to Know
Support Your Favorite Charities While Potentially Reaping Tax Benefits
Taxes are an unfortunate fact of life. However, if you develop a strategy to reduce your total taxable income, you may see a marked decrease in the amount you owe each year – which can be a welcome outcome as we approach the holiday season and begin spending more on gifts, travel, and entertaining. If you’re hoping to reduce your taxable income this year, you might be happy to hear that you can enjoy possible tax benefits while also making a positive difference in other people’s lives. To do so, you need to select the right year-end charitable giving strategy. Read on for five such strategies that may fit your needs, both from a philanthropic standpoint and as smart tax planning.
1. Donate Non-Cash Assets
If you choose this year-end charitable giving strategy, the best course of action is to only donate appreciated assets like these:
- Real estate
- Publicly-traded securities
- Interests in private businesses
There’s nothing wrong with donating depreciating assets (like vehicles) but appreciated non-cash assets will generally make a bigger difference when it comes to reducing your tax liability. Note that in most cases, appreciated assets need an official appraisal before you donate.
The donation process is a lot more complicated than just handing over an asset, so it’s a good idea to consult with a financial advisor or other financial professional. They can guide you through making a donation, and they can also help you receive the maximum tax benefit.
2. “Bunch” Your Donations
Let’s talk about the standard deduction for a moment. Now, it used to be much lower, meaning many people could exceed it and, therefore, lower their taxable income further. In 2017, it was $6,350 for single filers and $12,700 for couples. The Tax Cuts and Jobs Act greatly increased standard deductions in 2018. The reason was that Congress was making an effort to reduce the number of people who itemize their deductions. You only want to itemize your deductions if your total deductions are more than the standard deduction. In 2022, the IRS set the standard deduction as $12,950 for single filers and $25,900 for couples.
As a result of this change, it’s more difficult to exceed the standard deduction threshold, but it isn’t impossible. One way to help you meet the threshold is “bunching” your donations. When you “bunch” donations, you take the amount you would have donated over multiple tax years and donate within one tax year.
This year-end charitable giving strategy lets you itemize deductions in one year and claim the standard deduction in another. In most cases, it leads to better tax efficiency, though it’s advisable to work with a financial professional to determine if it’s right for you.
3. Give to Donor-Advised Funds
Are you ready to donate funds (and receive a tax benefit) but you aren’t quite sure where you want to donate yet? The solution may be a donor-advised fund (DAF). A DAF is an account that allows you to make your full charitable contribution before deciding where the funds should be allotted.
For instance, if you have a set amount of money to donate but need more time to select a charity, you could donate to a DAF by December 31 to ensure the donation counts toward the current tax year. With this year-end charitable giving strategy, you can gradually decide where to disperse your gift even if you make those decisions in the next tax year.
4. Establish a Charitable Remainder Trust
If you intend to give a portion of your estate to charity, consider creating a charitable remainder trust (CRT). With a CRT, you contribute an appreciating asset or an asset that produces income to a charity you choose.
However, the charity doesn’t start receiving money right away. Instead, you choose a beneficiary to receive that asset’s income for a set period of time. You can set yourself or someone else as the beneficiary. Once the predetermined time has passed, the asset (and associated income) is passed on to the charity.
This year-end charitable giving strategy is complex, and there are several considerations to make before setting one up. If you’re considering this philanthropic strategy, the best course of action is to discuss it with an experienced estate attorney.
5. Use Qualified Charitable Distributions
Qualified charitable distributions (QCDs) are another savvy year-end charitable giving strategy that can be a smart way to reduce your total tax liability while supporting an organization or cause that is meaningful to you. However, this isn’t a strategy for everyone — you must be at least 70 ½ years old and have a traditional IRA.
If you choose a QCD as a giving strategy, you can send up to $100,000 per tax year from your traditional IRA to a qualifying charity. This donation amount counts toward your required minimum distribution (RMD). It also won’t be counted as taxable income, which is advantageous in lowering your tax liability.
This year-end charitable giving strategy is not for everyone. However, it can be incredibly useful if you have a very high required minimum distribution that leaves you with a good bit of excess cash. Large donations can drastically reduce your tax liability, and they can also make a major positive change.
Need Help Developing a Year-End Charitable Giving Strategy?
If philanthropy is on your mind in this season of giving, be sure that tax planning is part of your year-end charitable giving strategy, too. Tax planning can be challenging, especially if you have significant assets. If you need to develop a tax-advantaged donation strategy, consider contacting a qualified financial advisor. The right advisor can look closely at your finances and help you determine the best way to help yourself while helping others, too.
At Paces Ferry Wealth Advisors, our clients are at the center of everything we do. If you’d like to work with an experienced team on year-end charitable giving, proactive tax planning strategies, or any other elements of your financial plan, we can help. Contact us today to schedule a conversation and learn more about our services.