- Charitable planning is an important topic to discuss, especially if you are facing extraordinary taxable events this year.
- Total giving in the U.S. during 2020, a year that included the start of the pandemic and global lockdowns, rose 5% compared to 2019, while giving from donor-advised funds rose 27%.
- In 2021, total giving by Americans rose 4% from 2020 to meet unprecedented needs related to the pandemic, while giving from donor-advised funds increased 28%.
- 2022 was the worst year for U.S. stock markets since 2008, as the outbreak of war, devastating hurricanes, and global humanitarian crises fueled recession fears. Yet donors with Schwab Charitable™ donor-advised fund accounts responded generously by granting a record $4.7 billion to charity, a 7% increase over 2021.
Ongoing market volatility and economic uncertainty make it even more important for donors to embrace an efficient, tax-smart approach to charitable giving, in order to achieve maximum impact on the causes they support. Here are 12 ways to help your clients increase their charitable impact and potentially reduce taxable income in 2023 and beyond.
Charitable giving strategies and tax benefits
1. Donate appreciated non-cash assets instead of cash.
You might be familiar with this concept, but many clients don’t realize that it’s more tax-efficient to give appreciated assets instead of cash. You can add value and reinforce your role as a trusted-advisor by showing your clients a tax-smart way to give.
Donating appreciated publicly traded securities, real estate, and other non-cash assets held more than one year means donors generally can eliminate the capital gains tax they would otherwise incur if they sold the assets and donated the sale proceeds. Donors who itemize deductions when filing their tax returns may also claim a charitable deduction for the fair market value of the assets. Eliminating the capital gains tax can increase the amount available for charities by up to 20% and increase the deduction amount.
2. Combine tax-loss harvesting with a cash gift.
This is a strategy to keep in mind for clients who have publicly traded securities in their portfolio that have declined in price to below their cost basis. They can sell those securities at a loss and use tax-loss harvesting to offset capital gains and/or up to $3,000 of ordinary taxable income. Donors who itemize their deductions can then claim a charitable deduction for donating cash from the sale proceeds. If capital losses are greater than capital gains and after reducing $3,000 of ordinary income, the net remaining loss may be carried forward to offset capital gains or ordinary income in future years.
3. Give private business interests.
While publicly traded securities are the non-cash assets most commonly donated to Schwab Charitable, executives and entrepreneurs may own interests in a C-Corporation, Limited Partnership (LP), or Limited Liability Company (LLC) that could make good gifts. This is especially true if the interests have been held more than one year, appreciated significantly over time, and retained more value than other assets the donor is considering.
Giving a percentage of a privately held business interest can generally eliminate the long-term capital gains tax a donor would otherwise incur if they sold the assets first and donated the proceeds. Plus, the donor can claim a charitable deduction for the fair market value of the asset, as determined by a qualified appraiser, if they itemize.
4. Contribute restricted stock.
Executives may also own appreciated shares of restricted stock, which cannot be transferred or sold to the public — including by charities — until certain legal and/or regulatory conditions have been met. Once the company’s general counsel removes all restrictions, the stock may be donated to and sold by a charity. Donation of restricted stock allows a donor to generally eliminate the long-term capital gains tax on the appreciation and claim a charitable deduction, if they itemize.
5. Combine multiple years of charitable contributions in tax year 2023.
Some of your clients may find that the total of their itemized deductions for 2023 will be slightly below their standard deduction amount (see “Tax deduction considerations” below). In that circumstance, it could be beneficial to combine or “bunch” 2023 and 2024 tax year contributions into one tax year (2023), itemize on their 2023 tax return, and take the standard deduction on 2024 taxes.
This bunching strategy, using both the standard deduction and itemized deductions, could produce a larger two-year deduction than two separate years of standard deductions. Bunching three or more years of contributions together may further increase a donor’s tax savings.
6. Combine charitable giving with investment portfolio rebalancing.
This is a powerful conversation for you to potentially initiate whenever you are rebalancing your clients’ portfolios or discussing strategies for concentrated positions. Help your clients understand that each time an appreciated position is sold in one of their taxable accounts, a taxable event occurs, but they can donate shares to eliminate the taxes they would owe.
Your clients can use a part-gift, part-sale strategy to potentially reduce the tax impact of rebalancing. They can accomplish this by claiming an itemized charitable deduction for donating long-term appreciated assets in an amount that offsets the capital gains tax on selling appreciated assets.
7. Offset the tax liability on converting a retirement account to a Roth IRA.
Clients with tax-deferred retirement accounts, such as traditional IRAs, may be able to use an itemized charitable deduction to help offset the tax liability on the amount converted to a Roth IRA. The primary benefits of a Roth IRA are potential tax-free growth, tax-free withdrawals (if holding period and age requirements are met), no annual required minimum distribution (RMD), and elimination of tax liability for beneficiaries (if account assets are passed to heirs).
8. Offset the tax liability on a retirement account withdrawal.
Your clients with tax-deferred retirement accounts can also use charitable deductions, if they itemize, to help offset the tax liability on the amount they withdraw, including an RMD. This strategy may be used by individuals over age 59½ (to avoid an early withdrawal penalty). A withdrawal offers the additional tax benefits of potentially reducing a donor’s taxable estate and reducing tax liability for account beneficiaries.
9. Leave a legacy by naming a charity as a beneficiary of IRA assets.
A unique feature of traditional IRAs is that heirs pay income taxes on the inherited assets at their own income tax rate at the time of withdrawal. This is why public charities can be ideal beneficiaries of IRA assets. Public charities do not pay tax on IRA income, which means every penny of the donation can be directed to support the donor’s charitable goals beyond their lifetime. What’s more, your clients can work with you and a tax professional or an estate planning attorney and leverage IRA assets after their lifetimes to fund a charitable remainder trust, which will combine a gift to charity with income to heirs.
10. Establish a charitable trust.
If you have clients who are interested in a source of income for themselves or family members, a charitable remainder trust (CRT) on its own or coupled with a donor-advised fund account may be a great option. A charitable remainder trust is an irrevocable giving vehicle funded with a gift of cash or non-cash assets. Income beneficiaries receive payments from the trust for a term of years or life and a public charity receives the remaining assets at the end of the term. The donor may claim a charitable deduction, if they itemize, in the year the trust is funded, and the deduction amount is typically based on the present value of the assets that will eventually go to the named charity.
A charitable lead trust is the reverse of a charitable remainder trust, in that a public charity first receives an income stream from the trust for a term of years. The irrevocable giving vehicle is funded with a gift of cash or non-cash assets. Benefits to the individual who funds the trust will vary depending on the trust structure. After the income stream period ends, the trust’s remaining assets are distributed to an individual or multiple people.
11. Use a donor-advised fund account as a component of any of the 10 strategies above.
A donor-advised fund is a public charity, and contributions of cash and non-cash assets are eligible for charitable deductions, for your clients that itemize. Contributed assets may be invested for potential tax-free growth, and donors can recommend grants from their accounts to other public charities of their choice at any time. Donor-advised fund accounts also can be a charitable beneficiary of IRA assets or be the named remainder beneficiary of a charitable trust.
12. Satisfy an IRA RMD through a non-taxable qualified charitable distribution (QCD).
Individuals age 70½ and older can direct QCDs of up to $100,000 per year from their traditional IRAs to operating charities (excluding donor-advised funds) and reduce their taxable income.3 Starting in 2023, donors can also direct a one-time, $50,000 QCD to a charitable remainder trust or charitable gift annuity as part of recently passed SECURE Act 2.0 legislation.
A QCD can satisfy all or part of a donor’s annual RMD, is not taxable income for the donor, and does not qualify for a charitable deduction. Note that married couples who submit joint tax returns each qualify for an annual QCD of up to $100,000, for a potential total of $200,000, and the SECURE Act 2.0 mandates annual inflation-based adjustments of the QCD limit starting in 2024.
Tax deduction considerations for charitable giving
Donations are deductible for clients who itemize when filing their income tax returns. Overall deductions for donations to public charities, including donor-advised funds, are generally limited to 50% of adjusted gross income (AGI). The limit increases to 60% of AGI for cash gifts, while the limit on donating appreciated non-cash assets held more than one year is 30% of AGI. Contribution amounts in excess of these deduction limits may be carried over up to five subsequent tax years.
Clients who itemize rather than take the standard deduction typically do so because the total of their itemized deductions exceeds their standard deduction amount. Inflation-based adjustments pushed standard deduction amounts for 2023 to new highs: single filers may claim a $13,850 standard deduction, while married couples filing jointly can claim a $27,700 standard deduction.
If your clients are considering any of the charitable tax strategies in this article, you may want to consult with their tax and legal advisors before taking action or encourage them to do so.