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Tax-smart strategies for charitable giving

First National Wealth Management

Tax-smart strategies for charitable giving

Paula Bindert
Wealth Advisor – Tax Consultant

As we enter this season of giving, you’re likely making charitable gifts a top financial priority right now.

To help deepen the effects of your giving and reduce the impact of taxes as we near the year-end, consider these tax-smart strategies that will provide important advantages to you.

Consider directing a qualified charitable contribution from your IRA

A qualified charitable contribution (QCD) is a distribution that goes directly from your IRA to a qualified charity of your choice.

Beginning at age 70 ½, you can make a QCD of up to $100,000 per year without having to pay taxes on that distribution. If you are age 73 or older, you can also use a QCD to satisfy your required minimum distribution (RMD).

This strategy is advantageous for you if your total itemized deductions fall under the standard deduction.

For example, let’s assume Mac (74) and Martha (73) gift $20,000 to a charity each year.

Their only other itemized deduction is the state and local tax deduction, which is limited to $10,000.

In that case, their total itemized deductions are $30,000 — compared to their total age-65-plus standard deduction of $30,700 for 2023.

If Mac and Martha are in the 22% bracket and instead make a $20,000 QCD from their IRA directly to a charity, they can save $4,400 in income tax. And, the charity receives the $20,000 either way!

Consider bunching your charitable contributions from year to year

After the passage of the Tax Cuts and Jobs Act in 2017, the standard deduction nearly doubled.

As a result, fewer taxpayers are now able to itemize and receive a tax benefit for their charitable contributions.

If you find that your total itemized deductions are just below the level of the 2023 standard deduction — like in the example of Mac and Martha — it may be beneficial to bunch your 2023 and 2024 contributions into one year (2023), itemize your deductions on your 2023 tax return, and then take the standard deduction on your 2024 tax return.

For example, let’s use what we know about Mac and Martha but, in this case, assume that they are both age 65 and, therefore, not eligible for a QCD.

If they gift $20,000 to a charity annually, their itemized deductions of $30,000 fall just under the standard deduction each year.

But if they bunch their charitable deductions for 2023 and 2024 into one tax year, they can achieve a larger itemized deduction in that one year.

Then, they can fall back to the standard deduction in year two, providing them with a larger charitable tax impact over the two tax years.

Consider contributing appreciated securities held more than one year, rather than cash

Donors who utilize this strategy can eliminate the capital gains tax they would otherwise incur if they sold the security first and then donated the cash proceeds.

For example, if you donate $20,000 of stock held more than one year with an original cost basis of $5,000 directly to a charity, you would save $2,250 in capital gains tax (assuming a 15% capital gains rate) by donating the stock directly to the charity.

Consider giving with a donor-advised fund

A donor-advised fund (DAF) is a fund sponsored by a public charity; you contribute to the fund and subsequently recommend distributions to your favorite charities when you are ready down the road.

With a DAF, you can essentially contribute several years of charitable contributions to the fund in one tax year.

And, if you itemize your deductions, you can qualify for the entire tax deduction in the year you contribute to the fund.

This tax-smart strategy can be especially useful to help reduce taxable income in the year of a significant tax event, such as the sale of a business, a rental property, or farmland.

Each of these strategies offers a tax-advantaged way to give to charity — but before utilizing any of them, please consult your tax advisor to determine which strategies might work best for you.

And, if you have further questions or want assistance with planning your charitable giving, send our team a note.

Have questions? We're here to help.

Paula Bindert
CPA

Paula Bindert

Wealth Advisor – Tax Consultant
Don Rahn
CFP®

Don Rahn

Wealth Advisory Manager
Maggie Groteluschen
JD, MBA, CTFA

Maggie Groteluschen

Fiduciary Services Manager
Adam Cox
JD, MBA

Adam Cox

Executive Vice President and Chief Wealth Management Officer
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