Planning Opportunities To Consider Before Year-End – Part 4: Charitable Contributions

As the end of 2023 approaches, we at ACM Wealth want to ensure our clients have not missed any opportunities to enhance their financial situation. In previous weeks, we have discussed Required Distributions from your IRA, reviewed realized capital gains and converting part of your IRA to a ROTH IRA. This week’s year- end checklist item focuses on charitable contribution, and strategies to maximize the benefit you can receive from these contributions.

Giving to charity can be life- affirming- and, as a bonus, it can help with your tax bill. If donating to a charity is part of your tax plan, below are a few tips so you can maximize your tax- deductible donation before year- end.

In 2023, as in 2022, there is no longer the ‘above- the – line’ deduction for charitable deductions, as there was in 2020 and 2021. What does this mean? Donors will need to itemize ALL of their charitable contributions. With the standard deduction of $13,850 for single filers, and $27,700 for those filing a joint return, exceeding these thresholds can be difficult. What can be done?

In order to maximize the tax benefits of their generosity, donors can ‘bunch’ their charitable contributions, funneling their contributions into one tax year and forgoing donations for other years. This will allow the tax payer to itemize for the year they donate, and take the standard deduction for other years they do not make a charitable donation.

As an example, assume John and Lynn, who file a joint return, regularly donate $10,000 annually to various organizations. But, their total itemized deductions, including their $10,000 in donations, do not exceed their standard deduction. In order to maximize the tax benefit of their charitable gifts, John and Lynn can ‘bunch’ two (or more) years of donations into one year, and forgo donations in other years. This will allow them to itemize in the year the donation is made, and taking the standard deduction in the year (or years) they forgo a donation, thus minimizing their overall tax liability.

In lieu of a cash donation, donors can consider giving shares of appreciated stock instead. Donating stock has two benefits: one, the value of your stock donation is equal to the fair market value of the stock at the time the donation is made (not the purchase price) and: two, you will not have to pay capital gains tax on the appreciated stock you donated.

Qualified contributions of cash are limited to 100% of the taxpayers’ Adjusted Gross Income (AGI) and gifts of stock are limited to 30% of the taxpayers’ AGI. AGI percentage limits on other property (other than stock) that is donated, and the organization donated to, can lower these limits. It is best to consult with your accountant to determine the actual AGI limits.

Donors who either bunch deductions or give appreciated assets may want to consider a donor- advised fund, or DAF. These allow the donor to take an upfront deduction in the year the donation was made to the DAF, and direct donations to specific charities in the future. A DAF has its own restrictions, and contains fees, so please consult your ACM advisor for details.

A final gifting strategy for taxpayers age 70 ½ and older and is a Qualified Charitable Distribution (QCD). A QCD is a direct transfer of funds from your IRA custodian to a qualified charity. If you have check writing privileges on your IRA, you can write the check directly to the charity of your choice. If you do not have check writing privileges, you cab submit a distribution request to your custodian and instruct them to make the check payable to the specified charity. Having a distribution made to you directly and then writing the check to the charity negates the benefits of the QCD.

The benefits of a QCD are:  (1) the QCD is excluded from your taxable income and; (2) a QCD reduces the amount of your required distribution (for those 73 and older), thus lowering your taxable income. This can lower your Medicare premiums (IRMAA) in addition to lowering your taxable income. The maximum annual amount that can qualify for a QCD is $100,000.

And finally, to qualify, any contribution must be made to a qualified organization on or before December 31 of the tax year. If contributing cash via check, it must be postmarked by December 31 to conform with the Treasury Department’s ‘delivered when mailed’ rule.

If you plan on gifting securities to a charity, , or making contributions to or grants from a Donor Advised Fund, please check with your custodian for year- end processing guidelines as they may require these to be processed earlier in December to ensure completion by year- end.

Please reach out to your ACM wealth advisor with any questions about charitable contributions.

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