Maximize Charitable Impact and Minimize Taxes with These Year-End Gifting Strategies

The approaching holiday season often motivates charitable giving. Year-end is also a time when investors focus on tax reduction strategies. Charitable contributions and tax reduction strategies are not mutually exclusive and in fact can be complementary.

Specific tax-deductible charitable giving strategies can actually help reduce tax burdens while also supporting important charitable causes. Here are some strategies you can consider to accomplish these dual goals.

Donate cash while tax-loss-harvesting

The most common type of charitable giving is through a cash donation. One way to generate cashflow for a gift is through “tax-loss-harvesting.” For example, if you have securities that have declined in value from their original cost basis, you can sell those at a loss. Then you can use that loss to offset capital gains from other investments (and up to $3,000 of ordinary income) while also claiming a charitable deduction for the total amount of cash donated.

Gift publicly traded securities that have appreciated over time

Appreciated stocks, bonds, or mutual funds represent an increasingly popular method for making charitable donations. Most organizations are set up to accept these types of appreciated gifts. Nonprofits are exempt from federal taxation, so they can sell the gifted securities without incurring tax on the capital gains that the donor would incur if the donor first sold the securities and then donated cash.

Generally, the fair market value of donated securities previously held for long than a year can be claimed as an itemized deduction (assuming itemization).

Donate more complex non-cash or illiquid assets

The process of donating complex non-cash or illiquid assets (ex: equity compensation awards, restricted stock, shares of a private company, real estate, art, collectibles, cryptocurrency) can require more time and effort than donating cash or publicly traded securities but there are still advantages, especially if the assets have a low tax basis.

Issues to consider when donating these types of assets include:

• A qualified appraisal may be required before the donation to substantiate fair market value.
• Not all charities can handle such assets (however, most Donor Advised Funds programs can, and they can often facilitate these types of donations for those charities – more on that later). 
• Additional laws and regulations may apply (ex: Rule 144 resale restrictions), so it is essential to consult your legal, tax, and financial professionals when considering donating these types of assets. 

Concentrate multi-year giving

Concentrating several years’ worth of donations into a single year (provided you can do so), then skipping contributions for several years, can allow you to make a significant charitable impact while maximizing the tax deduction for your contributions.

Charitable Donation + Roth Conversion

The potential benefits of the Roth IRA (including tax-free growth and tax-free withdrawals in retirement) make them a popular tool for tax-savvy retirement strategies. However, due to income limits, many cannot take advantage of a Roth IRA annual contribution. An alternative for those who can't contribute is the conversion of eligible retirement accounts (like a traditional IRA) into a Roth. However, the conversion does generate a current taxable event.

Itemized charitable tax deductions can help offset a Roth IRA conversion's tax cost, thus mitigating current and potential future taxes. Remember that you may take nontaxable withdrawals from a Roth IRA if you are at least 59 ½ and the account has been held at least 5 years. Otherwise, earnings withdrawn may be subject to ordinary income tax and a 10% penalty.

Turn RMDs into QCDs

If you are subject to taking a required minimum distribution (RMD) (generally if age 72 and have pre-tax dollars funded retirement accounts) and plan to make a charitable contribution in the same year, making a qualified charitable distribution (QCD) from your qualified plan might make sense.

The tax law imposes RMD requirements because the funds were created with pre-tax dollars and Congress wants to ensure a minimum amount of distributions are taken (and income tax incurred).

A QCD allows you to directly transfer funds from your retirement account to a qualified charity that also satisfies the RMD requirement for the year without any tax consequences (provided specific conditions are met).

This strategy can also be appealing if you are already close to your charitable deduction limitations but would like to expand your giving. A QCD is not reportable as income nor as a deduction; therefore, it would not be counted against charitable deduction limits and does not require itemization to be effective.

Establish a donor advised fund

A donor-advised fund (DAF) is an account that allows you to make charitable contributions to a unique type of public charity (established to sponsor and act as administrator for DAFs) and receive an immediate tax deduction. Then, in the future, you can direct contributions to other charities from the DAF.

A DAF can be a desirable option if:

• You want to make a tax-deductible charitable contribution this year, but still need some time to determine which charities you’d like to support with grant recommendations. 
• You are considering a concentrated giving strategy with several years’ worth of contributions but would like to maintain annual gifting for specific charities.
• You are looking for a way to contribute complex non-cash or illiquid assets to charities that are not capable of taking those types of donations.
• You have charitable inclinations and are looking to mitigate the tax implications of year‐end bonuses or stock option exercises. 

One of the attractive features of DAFs is that donated assets can be invested and earn returns without being taxed (subject to certain limitations), expanding the impact of future charitable gifting well beyond the initial gifted amount.

Optimizing the Impact of Your Charitable Contributions

While charitable contributions must be received by December 31, 2023, to qualify for tax-deductible charitable donations on 2023 tax returns, some non-cash asset contributions may take several weeks (or longer) to facilitate, and a 2023 RMD/QCD request should be submitted a month (or more) before year-end to ensure the request is received by December 31, 2023.

These effective strategies can help if you’re looking to maximize your charitable impact and reduce tax burdens. As year-end deadlines approach now is the time to consult your legal, tax, and financial professionals to discuss your goals. If you need help navigating any these strategies, our experienced advisors can help.