4 Tax-Savvy Charitable Giving Strategies At Year-End

Are you looking for creative ways to give back before the year draws to a close? Giving back is rewarding and can help you maximize your tax savings. Qualified donations made before January 1st could save you a significant sum and help you be well-prepared when tax season rolls around. Let’s dive into creative ways to make a difference while boosting your tax savings.

Think Outside of the (Cash) Box

While cash/check may be the first thing that springs to mind when considering your year-end giving, another potentially more advantageous option is donating long-term appreciated assets. Why? You could save yourself on costly capital gains taxes. By donating highly appreciated assets, neither you nor the charity are on the hook for taxes on the gain, effectively boosting the value of your gift. Whereas if you sold the asset first, you’d need to pay taxes and ultimately reduce how much you can give. Long-term appreciated assets can include things like:

• Stocks

• Bonds 

• Real Estate

• Employer stock options

• Mutual fund units

Donating long-term appreciated assets does more good than avoiding capital gains tax—you can also take an income tax deduction for the total fair market value of the asset. While you can generally deduct up to 60% of your adjusted gross income via charitable donations, you can only claim up to 30% of your AGI for non-cash asset donations. That said, few people give more than 30% of their taxable income to charity, so it’s still an attractive tax-advantaged giving option. 

Bunch Your Donations Together

Another outside-the-box giving strategy is “bunching,” which refers to grouping charitable gifts you intend to give over a future period into a single year. Let’s look at an example of when bunching can be beneficial. Say you’re single and you’ve had a good income year, leaving additional funds available to donate. If you usually give $10,000 to charity annually, you could instead give $20,000 in 2022 and itemize your deductions. Then, even if you don’t give to charity in 2023, you can still take the standard deduction! That way, you will surpass the standard deduction in 2022 and increase your tax savings. Essentially, you'll consolidate tax deductions into one year rather than over a few years. Keep in mind that the 2022 standard deduction for single people is $12,950 and $25,900 for couples. In 2023, this will increase to $13,850 and $27,700, respectively. So, if your aggregate itemized deductions (excluding the charitable deduction) are below their standard deduction, consider bunching your donations to give more while saving on taxes.

Open A Donor Advised Fund

Another increasingly popular method of tax-advantaged giving is a Donor Advised Fund (DAF). Forbes reports that from 2015 to 2019, DAF contributions increased by an astounding 80%. Some reasons for this could be the ease and convenience of the account coupled with immediate tax savings. These funds are essentially a charitable investment account you establish with a qualified custodian, allowing donors to contribute and receive an immediate tax deduction. Donors then recommend grants from the fund over time.DAFs are especially useful if you need to maximize your charitable deductions but aren’t sure what cause you want to support. If you have a high-income year, you can allocate funds towards your DAF to sidestep higher taxes, then donate the money when you’ve decided on a cause you are passionate about.DAFs can also help you with regular giving. You can recommend grants in equal intervals over time, so you can still give consistently while still taking one significant deduction. Some of the other benefits of giving with a DAF include: 

• They are easy and flexible to use. 

• You can streamline your giving, saving hassle when tax season rolls around.

• Most DAFs allow donations from a wide range of non-cash assets.

• You can use your DAF for bunching. 

You can establish a DAF with the charitable branch of most major investment firms, so consider asking your financial advisor if it could be a practical giving method for you. While it’s a smart financial move for many, keep in mind that there are a couple of downsides:

• Giving is irrevocable, so once you put the money in your DAF, you can’t take it out again. 

• These accounts can be expensive to maintain, so make sure you’re clear on any fees ahead of time.

Already Retired? Look Into A Qualified Charitable Distribution

If you are retired, consider giving through a Qualified Charitable Distribution. A QCD is a direct transfer from an IRA to a qualified public charity. Giving in this way can help you meet your IRA’s Required Minimum Distribution (RMD) while managing your tax bracket and subsequent liabilities. Here’s how QCDs work. If you’re over 72 with a traditional IRA, you must withdraw a set annual amount that counts as taxable income. Your IRA custodian will tell you what this amount is each year. By making a Qualified Charitable Distribution, you can meet your RMD, give to causes you care about, and avoid unnecessary taxes. QCDs are limited to $100,000 annually per person and must be made directly to an approved charity. Should you remove the money first, you’d need to pay income taxes, so be sure it’s a direct custodian-to-custodian transfer. You can donate all or a portion of your RMDs during this process; it’s not an all-or-nothing arrangement. If charitable giving is already part of your life, QCDs could be a practical, tax-efficient way to make the most of your generosity. 

How A Financial Professional Can Amplify Your Giving Strategy

These tax-advantaged giving methods are just the tip of the iceberg regarding financial maneuvers that could bring you closer to your financial goals. If you would like help from a professional, we can walk you through your finances and help you give in smart ways that set you up for long-term success. If you would like to set up a time to speak with one of our financial professionals, reach out today.