Charitable giving affords crucial support to nonprofit organizations that are providing essential services to communities. With a little planning, they also offer potential income tax savings to the donor.
For income tax purposes, the amount of a deductible contribution is subject to limits based on the donor’s adjusted gross income (AGI), the type of property given to the charity, and the charity’s tax-exempt status. For an individual to deduct contributions, they must itemize their deductions using Schedule A of Form 1040. The Tax Cuts and Jobs Act of 2017 increased the standard deduction, so clients have had to be more strategic in their gifting to take advantage of the tax savings of their charitable giving.
One of the most common strategies used since TCJA is donation bunching. Donation bunching is a tax strategy that consolidates your donations for two years into a single year. When added to your other itemized deductions, the contribution amount must be great enough to exceed the standard deduction. In 2023, the standard deduction is $13,850 for single taxpayers, and for those who are married and filing jointly, it is $27,700.
For example, assume a married couple has only itemized deductions of taxes and contributions. Assume the itemized deductions for taxes is $10,000. The taxpayers would need to contribute more than $17,700 ($27,700-10,000) to itemize on their return. Rather than making a $9,000 contribution annually, they could make an $18,000 contribution every two years. Changing the timing of when they make the donations will allow them to achieve some tax savings. Tax savings will be based on the taxpayer’s marginal tax rates, so the higher the taxpayer’s marginal tax rate, the greater the savings.
Another increasingly common vehicle for charitable giving is a donor-advised fund (DAF). You are eligible for an immediate tax deduction in the year you contribute to a DAF (as long as you itemize on your 1040 as noted above). The DAF can invest those funds for tax-free growth, and the donor can recommend grants to an IRS-qualified public charity in subsequent years. This allows you to make a larger up-front contribution and receive the tax benefit while allowing control and discretion on which charities receive the money and the timing of the grants. Note that you receive the contribution deduction at the time the DAF is funded. There is not a second deduction when the charities actually receive the funds.
If you are 70 ½ or older, you may consider a Qualified Charitable Distribution (QCD). A QCD is a direct transfer of funds from your IRA custodian, payable to a qualified charity. QCDs can be counted toward satisfying your required minimum distributions (RMDs) for the year, providing certain rules are met. The maximum annual amount that can qualify for a QCD is $100,000 (indexed for inflation starting in 2024). The tax savings benefit of a QCD is rather than itemizing deductions on your return, the QCD amount is excluded from your taxable income. Currently, QCDs to a donor-advised fund are not permitted.
In addition to the strategies on when to contribute, another important consideration is what assets to use to make your contribution other than cash. Contributions of appreciated property are deductible based on the property’s fair market value at the time of the contribution.
One common type of property used in charitable gifting is appreciated stock. This is stock that has increased in value since it was acquired and has been held for more than one year by the donor. The donor receives a deduction for the stock’s fair market value at the date of the contribution, and the donor escapes income tax on the appreciation. Stock is considered capital gain property and is subject to 30% AGI deduction limitations.
The rules for property vary with the type of property (real or personal, intangible or tangible), the holding period, the kind of charity, and how the property is to be used. For certain types of property, appraisals must be obtained. Please consult with your tax advisor.
If an individual is not ready to make an outright gift, various techniques are available to make a charitable contribution and obtain a current-year income tax charitable deduction while retaining an interest in the property to be contributed. These techniques come with additional administrative and reporting requirements and are too broad for the scope of this article other than to mention them as follows:
- A charitable remainder trust (CRT) in which an income interest is retained.
- A gift of a remainder interest in a personal residence or farm.
- A gift of a lease on, an option to purchase, or an easement or remainder interest in real estate for conservation purposes.
- A bargain sale to charity.
- A transfer of property to charity in exchange for an annuity.
If you are interested in additional information on these strategies or if you have other questions about charitable giving, please contact us at Sciarabba Walker.
By Christina Larkin, CPA, CFP®