Littlejohn: 5 year-end charitable giving strategies
Special to The Aspen Times
With year-end approaching, now may be the perfect time to take advantage of valuable tax savings through charitable donations. It’s one of the few win-wins in finance, as you can lower your taxable income while making a greater impact with your money.
However, to get the most from your charitable giving, it’s important to understand which strategies have the greatest potential to reduce your tax burden while simultaneously meeting your philanthropic goals. If you’re feeling charitably inclined this year, here are five giving strategies to consider before year-end:
1. Bunch multiple years’ worth of donations
In 2022, you can only claim your charitable donations on your tax return if you itemize.
If your income and circumstances have been relatively stable since last year, you likely know already if you plan to itemize or take the standard deduction this year. However, if you’re on the fence, you may want to consider “bunching” your charitable donations to maximize your deduction.
For example, say you plan to donate $5,000 to charity each year for the next several years. If you have extra cash on hand this year, you may want to consider donating $10,000 or more to your charity of choice, so you can itemize your deductible expenses.
Then, next year, you can skip your regular donation and take the standard deduction if appropriate. This way, you’re meeting your philanthropic objectives without losing the associated tax benefit.
2. Donate appreciated securities
Although it’s been a down year for many investors, you may still hold securities with significant embedded capital gains. While selling highly-appreciated securities can result in a large tax bill, donating them can have multiple benefits.
First, by donating appreciated securities, you can get a deduction for the security’s total market value without paying any capital-gains tax. In addition, many charities can receive donations of securities and then turn around and sell them without paying any capital-gains tax.
Meanwhile, you can use the opportunity to diversify your portfolio if you’ve accumulated a concentrated position or rebalance it back to its original asset allocation if market movements have caused your positions to drift from their targets.
There are a couple items to keep in mind before leveraging this strategy. First, you must have held the asset for more than one year to avoid paying the capital-gains tax.
Moreover, you can also use this strategy for more complex, privately-held assets — for example, an appreciated business interest, real estate, or other privately-held assets. This can be very valuable since you can avoid the process of trying to liquidate complex assets while also benefiting from a tax write-off.
3. Give to a donor-advised fund
If you’re considering a large donation or using a bunching strategy but aren’t sure where you want the donation to go, a donor-advised fund (DAF) may be the right choice.
With a DAF, you can donate and take a deduction for that amount in the current year. However, you don’t have to distribute the funds to a specific charity right away. Instead, you can continue growing the funds within the DAF and elect to distribute them to a charity of your choosing in the future.
This can be a powerful strategy to create a significant deduction during high-income years. Just remember that any donations you make to a DAF are irrevocable and must eventually go to a qualified charitable organization.
4. Donate cash after selling shares at a loss
With the markets down, some of your assets may have embedded losses. While selling investments at a loss can offset gains and reduce your tax bill, you can also benefit from donating the proceeds.
For example, say you hold two securities — one has an embedded gain of $25,000 and the other one has declined $15,000 in value since you purchased it. By selling both in the same tax year, you can reduce your realized capital gain to $10,000. Then, you can donate the cash proceeds to a charitable organization of your choice and take the associated tax deduction for the donation.
5. Consider a Qualified Charitable Distribution
To keep tax revenue rolling in, the IRS requires Americans to begin taking required minimum distributions (RMDs) from tax-advantaged accounts, like traditional IRAs, once they reach a certain age. Since 2020, that age has been 72.
If you don’t need the extra income, you can donate your RMD to charity — a tax-planning strategy called a qualified charitable distribution (QCD). A QCD allows IRA owners to transfer up to $100,000 directly to charity each year.
QCDs can satisfy all or part of your annual RMD, depending on your income needs. You can also donate more than your RMD amount up to the $100,000 limit. And, since QCDs aren’t taxable events, they don’t increase your taxable income like RMDs do.
It’s important to note that the IRS considers the first dollars out of an IRA to be your RMD until you meet your requirement. If you take advantage of this tax-planning strategy, be sure to make the QCD before making any other withdrawals from your account.
Brian Littlejohn, MBA, CFP®, CFA, is the founder of Sherwood Wealth Management, an independent, registered investment advisor firm that specializes in inherited wealth. He lives in Woody Creek and works with clients in the Roaring Fork Valley and beyond.