Charitable gifting can occur throughout the year; however, many individuals and families focus on their charitable giving in the fourth quarter as it coincides with annual tax planning. Charitable donations are tax deductible for individuals who itemize their deductions when they file their tax return. The annual deduction limit for gifts to public charities is 60% of Adjusted Gross Income (AGI) for gifts of cash and is 30% of AGI for non-cash donations.
The six strategies below may help maximize your charitable impact and your annual income tax savings:
1. Make Qualified Charitable Distributions from your IRA.
Individuals who are at least 70½ years old can donate up to $100,000 from their IRA annually as a Qualified Charitable Distribution (QCD). The distribution is made from pre-tax dollars and can be used to satisfy your annual Required Minimum Distribution, if applicable.
2. Donate appreciated securities.
Consider donating appreciated securities rather than selling the position and donating the cash proceeds. This strategy may be particularly advantageous for individuals with concentrated positions with large unrealized capital gains. Donating the securities directly to charity eliminates the capital gains tax you would have to pay as a result of selling the security. This article compares donating cash and property.
3. Donate cash from the sale of depreciated securities.
Taxpayers benefit from recognizing losses rather than gifting depreciated securities. Consider harvesting tax-losses from your portfolio and donating the cash proceeds. In this way, you can recognize a tax-loss that can offset any capital gains for the year or be used to offset up to $3,000 of your ordinary income, and you will receive a charitable deduction for your cash donation. Tax-loss harvesting may be a popular strategy in 2022 as taxpayers seek to reduce their taxable income.
4. Increase your charitable giving when you expect higher annual income.
Charitable donations are deductible and may reduce your taxable income. You may consider increasing your charitable giving in years where your income is expected to be higher due to a liquidity event, stock options, capital gains, or Roth conversions.
5. Bunch your contributions.
Many taxpayers now take the standard deduction rather than itemizing their deductions. Charitable contributions are only tax deductible to those who itemize. The standard deduction is $12,950 for single filers and $25,900 for joint filers in 2022. To help itemized deductions exceed the standard deduction amount, you may consider bunching your charitable contributions. Rather than donating $10,000 to a charity each year, for example, you may consider making a $20,000 donation this year and skipping your donation next year.
6. Consider a Donor-Advised Fund.
If you like the idea of bunching your contributions or making a large charitable donation in the current year but aren’t sure where you want the proceeds to go, you may consider a Donor-Advised Fund (DAF). Your contribution to the DAF will be deductible in the year of the gift but grants from the DAF to charities can be made later.
Charitable giving strategies may vary depending on your specific goals and circumstance. We recommend consulting with a tax or wealth advisor to identify the charitable strategies best suited for you. Please contact us with any questions or to schedule an appointment.
Editor’s Note: This article was originally published in November of 2020. It has been updated to reflect gifting strategies for 2022.