Seven Ways to Maximize your Charitable Gift

The first quarter ritual of information and documents gathering for the annual Federal [and sometimes state(s)] tax filing, while painful, is also a valuable time of reflection and commitment to new practices for the new year.

Two questions that we hear frequently during the new year are:

• I make charitable gifts by check or as an online payment, is there a better way to give?
• How did I give away so many small gifts to so many different organizations last year?

Let’s discuss those two questions in two blog posts.  This blog will address potentially “better” structural and tax aware giving methods for donors than current year cash gifts.  In other words, how can you make sure you are maximizing the charitable gifts that you have budgeted.   In our next blog I’ll cover focus and impact of giving.  

There are a number of ways to be charitable and some ways are better, depending upon the location of your assets, your age and your itemization status.  Whatever amount of philanthropy you decide upon, maximize the charitable value of that gift, and ensure you are taking the personal benefits allowable.

For individuals who are in no income tax states like Texas or Florida, it can be difficult for some to itemize since deductions are mostly limited (now medical, State and Local Taxes-SALT, mortgage interest, charitable donations) and the standard federal deduction in 2022 for couples married filing jointly is $25,900 and for single taxpayers and married individuals filing separately is $12,950.  One strategy for younger, healthier charitable individuals is to implement a “bunching strategy (see more below in #1).”  Annual income deduction limits for gifts to public charities, including donor advised funds, are 30% of Adjusted Gross Income (AGI) for contributions of non-cash assets if held for more than one year, and 60% of AGI for contributions of cash.  Gifts in excess can be carried forward for up to five years and then they expire.  Here are seven strategies to consider and talk with your advisor and tax professionals:

• Concentrate your giving every other year, AKA The Bunching Strategy. That way, you can take the standard deduction in odd years (for example) with minimal or no giving.  Then consolidate your two-year giving budget into the even year and it will be easier for you to exceed that standard deduction threshold.

Here is a comparison of using the standard deduction every year on top, compared to this “bunching strategy” on the bottom chart.  In this simplified example, the donor was able to deduct $5,700 more dollars over four years simply by changing from an annual contribution approach to a biennial strategy.

ANNUAL CONTRIBUTION STRATEGY

BUNCHING CONTRIBUTION STRATEGY (BIENNIAL CONTRIBUTION)

• Contribute appreciated securities instead of cash.  This strategy has two benefits—the donor avoids the capital gains tax (long term cap gains tax is 15% or 20% depending upon the income bracket and potentially the additional Net Investment Income tax of 3.8%) and this allows more money to flow to the charity.  Here is a simple example:

Assumptions—

-Donor owns 1,000 shares of long term XYZ stock, worth $11/share, interested in giving to public charity

-Cost basis $1/share

-Long Term Cap gain tax rate=15%, Ordinary tax rate=35%, Net Investment Income Tax=0

• Make contributions from your IRA. Donors who are at least age 70 ½ can donate up to $100,000 per year from their IRA as a Qualified Charitable Distribution (QCD). This contribution is made from pre-tax dollars (IRAs are tax deferred accounts and all taxes on IRAs are paid upon distribution) and can also be used to satisfy your annual Required Minimum Distribution (RMD), if applicable.  This strategy allows you to use pre-tax dollars and can therefore contribute 100% of the value of the contribution to the charity.   If you do not need/want your RMD for current income, you can also satisfy that obligation at the same time.

• Contribute (using the bunching strategy above) to a Donor Advised Fund (DAF).  One of the advantages of a DAF is that it separates the tax deduction part of the equation [the DAF is a 501 ( c) 3] with WHERE and TO WHOM you want to make the contribution.  Dollars or securities contributed to a DAF, qualify for a tax deduction in that year. This donation will grow tax free until directed to your charity. The DAF will also simplify recordkeeping.

• Use employer (and sometimes retiree or other organizational) matches for gifts. Another way to increase the size of your gift is to take advantage of any eligible employer/foundation matches.   Some firms will contribute to a dollar cap, others will contribute a percentage up to a cap.  Make sure you are accessing those benefits.

• Establish a Charitable Trust. For larger donors, charitable trusts can be a great strategy.  The charity can receive the remainder balance in a in a Charitable Remainder Trust (CRT) and the donor or another person can receive the income from the Trust while the grantor is alive.  Another version of this is a Charitable Lead Trust (CLT) where the charity receives the Trust’s income, and another person receives the remainder at the grantor’s death. Because this gift is irrevocable, this does require expenses for set up, administration and tax reporting so is typically used with larger charitable donors.

• Very wealthy donors may want to consider establishing a Family Foundation or joining in a shared family foundation group. There are establishment and on-going expenses that make this prohibitive for smaller donors but can be an important way to establish values for future generations.

So now, as you gather your 2022 records for tax inputs, think about how NEXT YEAR when you are preparing your 2023 taxes, you can rest assured that you have both focused your giving to your intent (our next topic) and you have made the gift in a tax-aware, gift-maximizing manner. 

Discuss these ideas with your own financial advisor, as well as your tax professional and legal counsel prior to implementing these strategies to maximize the value of your charitable gift.