Maximizing Year-End Contributions: Strategic Charitable Gifting

As tax laws evolve, so should your financial strategies. Effective tax planning can help you maximize deductions, support your charitable goals, and reduce your overall tax burden. Strategies such as bunching charitable contributions, using Donor Advised Funds (DAFs), gifting appreciated property, or making Qualified Charitable Distributions (QCDs) from IRAs offer unique tax advantages. By tailoring these approaches to your financial situation, you can make the most of current tax laws while ensuring your wealth benefits both you and the causes you care about.

 

Lumping, Bunching & Harvesting

Under the Tax Cuts and Jobs Act (TCJA), with the increase in the standard deduction and the $10,000 ceiling on State and Local Taxes (SALT), many taxpayers will receive greater benefit from the standard deduction. However, implementing planning strategies for charitable and other deductions for a certain year can reduce overall lifetime tax.

Two ways to maximize gifting is “lumping” itemized deductions or “bunching” charitable donations into specific time periods can help push taxpayers over the threshold for itemizing in a given year. For example, instead of giving a smaller annual gift to a charity, taxpayers could donate a larger amount biennially or every third year and receive the entire benefit of the charitable contribution by itemizing in contributing years and taking advantage of the standard deduction in the other years.

Donor-advised funds can significantly assist with “bunching” charitable gifts, a strategy that allows donors to maximize their tax benefits while maintaining their philanthropic goals. Utilizing a bunching strategy with a DAF is particularly effective during high-income years or after significant financial events (like selling a business or exercising stock options). By making larger contributions during these times, donors can offset higher income levels with substantial charitable deductions, effectively lowering their overall tax burden.

 

Donor Advised Funds

A donor-advised fund (DAF) is a charitable giving vehicle that allows individuals or organizations to make contributions, receive an immediate tax deduction, and recommend grants to other charitable organizations over time. This structure combines the benefits of philanthropy with significant tax advantages and administrative convenience.

Benefits of Using Donor-Advised Funds:

• Immediate Tax Deduction: Donors can claim an immediate tax deduction for their contributions to a DAF, even if the funds are distributed to charities later.
• Tax-Free Growth: Assets within a DAF can grow tax-free, potentially increasing the amount available for future charitable giving.
• Flexibility: Donors have the flexibility to decide when and how much to distribute from their DAF to various charities over time.
• Investment Options: Donors can recommend how their contributions are invested within the DAF, allowing for potential growth before distribution.
• Avoidance of Capital Gains Tax: By donating appreciated assets such as stocks or real estate directly into a DAF, donors can avoid capital gains taxes while still receiving a deduction based on the fair market value of those assets at the time of donation.

 

Contributions of Appreciated Property

Another important consideration would be to gift appreciated property, rather than cash, that has been held for more than one year. Donating appreciated property generally provides a benefit in two ways: the taxpayer gets a charitable deduction equal to the property’s fair market value (FMV) and the taxpayer would not recognize a capital gain or net investment income tax on that property.

If you hold various types of cryptocurrencies, consider making a charitable contribution in the form of appreciated cryptocurrency. By contributing appreciated cryptocurrency, it produces a double benefit: capital gains tax and Medicare surtax on net investment income could be mitigated and the taxpayer could receive a charitable deduction equal to the FMV. Cryptocurrency is treated as property for federal tax purposes. Therefore, tax principles that are associated with property transactions also apply to cryptocurrency, including charitable contributions.

 

Contributions of Future Interests

Certain gifts of future interest in property will result in a current tax deduction. By giving future interests, the taxpayer effectively accelerates the tax deduction to the year of the gift. Examples include Charitable Remainder Trusts (CRTs), pooled income funds, and gift annuities.

When deciding to make a charitable gift, it’s important to remember that there are adjusted gross income (AGI) limitations that could affect the charitable deduction. The type of charitable gift (e.g., cash, long-term capital gain property, or tangible personal property) and the type of organization (e.g., public charity or private foundation) will affect how the donation will be deducted for the tax year of the donation. It’s also important to verify that the charity for which you plan to gift is qualified as a charitable organization (501(c) or other entities in accordance with IRS code 170).

 

Qualified Charitable Distributions from IRAs

Are you age 70½ or older and own an IRA? Consider making a donation to charity under the “Qualified Charitable Distribution” (QCD) rules and enjoy several tax benefits:

• QCD donations may satisfy your Required Minimum Distribution (RMD) for the year. If you do not want or need your RMD amount and are charitably inclined, making a QCD donation out of your IRA is a great alternative to donating cash.
• QCD donations are tax-free and do not cause any additional tax liability, unlike a normal IRA distribution. No corresponding charitable deduction is taken as an itemized deduction, however.
• The QCD treatment for a donation made from an IRA is especially powerful for those taxpayers who will not have enough deductions to itemize in 2024.
• For tax year 2024, a taxpayer can distribute up to $105,000 (indexed for inflation) from their traditional or traditional inherited IRA.
• Distributions that are attributed to the QCD will likely be reported as taxable income on the 1099-R. For this reason, it’s important to keep records provided by IRA custodians and Charities.

QCDs have specific requirements that must be followed, so be sure to discuss this technique with your wealth advisor and accountant if you are interested.

 

Run the Numbers

As we near year-end, the bottom line is to run the numbers. Should you accelerate some deductions, defer income, or vice versa? Should you adjust your tax withholding or estimated tax payments? Spending some time to plan for the next tax season will afford you the opportunity to make any necessary changes before year-end.

We invite you to contact your Central Trust Company team with questions or for additional information.

 

 

Central Trust Company does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. Please consult with your tax advisor before engaging in any transaction.