Littlejohn: Tax-friendly giving strategies for the holiday season

As 2024 winds to a close, I’d like to take a minute to provide you with some ideas for how you might approach any giving you intend to do this holiday season. One of the questions I’ve fielded a few times now is centered around charitable giving: How can I keep giving, and get a little back on my taxes? The following are four possibilities worth considering.

1. Stagger your giving

Technically, you can still itemize charitable deductions. However, it remains much more difficult to benefit from doing so because of the Tax Cuts and Jobs Act (TCJA) of 2017. It essentially doubled the standard deduction available to taxpayers.

As a result, many families who used to itemize and realize tax benefits from their deductible donations have been deciding they’re better off taking the standard deduction instead — even though it means they’ll receive no tax benefit for their charitable giving that year.

---

---

A possible workaround is to stagger your giving and other deductible expenses. For example, you may be able to double up your charitable giving every other year in an effort to itemize in alternate years. In Year 1, give twice as much as you normally would if you can combine it with enough other deductibles to itemize and write off the expenses against taxes due. In Year 2, do what you can to minimize donations and other deductibles, and take the standard deduction instead … and so on.

2. Unload a highly appreciated holding

If you’re going to be donating anyway, consider donating highly appreciated securities like stocks, stock funds, property, or similar holdings that are worth considerably more than when you acquired them. If you sell a highly appreciated asset outside of a tax-advantaged account like an IRA, you’ll pay capital gains taxes on the difference between its cost and its sale price, less expenses. If you instead donate it “in kind” to a nonprofit organization (i.e., without selling it first), you triple the asset’s tax-wise potential:

---

---

• Within the parameters described above plus a cap based on your Adjusted Gross Income, the asset’s full value is available to you as a charitable deduction in the year you donate it.
• You avoid capital gains tax on the unrealized gain.
• The charity is free to keep or sell the holding, without incurring taxable gains.

3. Use a Donor-Advised Fund (DAF)

I plan to devote an article to DAFs in the future, but here’s a quick take on how they work:

• Make an irrevocable donation to a DAF sponsor, which acts like a “charitable bank.” The full amount of your donation is deductible in the year you fund the DAF. Plus, many DAFs accept in-kind holdings as described above (whereas not all individual charities can).
• Over time, you advise the DAF’s sponsoring organization on when and to whom to grant the assets. The DAF sponsor has final say, but you can expect they’ll honor your request unless your intended recipient is not a qualified charity or there are other unusual circumstances.
• Until the funds are distributed, the DAF sponsor typically invests the donated assets; any returns or appreciated value grows tax-free, giving your initial donation added impact.

In this way, DAF can help you stagger your charitable donation deduction as described above, without having to stagger your usual annual giving. For example, you could fund a DAF with five years’ worth of anticipated donations, and then make annual requests that donations be made to your charities of choice across five years. This should allow you to itemize the entire DAF donation in the first year and take the standard deduction the rest of the time. Plus, you can fund your DAF using appreciated holdings.

In short, DAFs can be a handy giving tool. That said, they aren’t ideal for every donor, every time.

4. Retirees: Donate your required minimum distribution

Again, if you’ll be making charitable contributions anyway, it may be a good idea to donate your Required Minimum Distribution (RMD) instead of taking it as ordinary income.

During your working years, there are many advantages to funding tax-advantaged retirement accounts. But eventually — when you reach age 72 (73 if you reach age 72 after Dec. 31, 2022), to be exact — you must begin taking RMDs from your tax-advantaged, non-Roth accounts. There is a steep penalty if you fail to do so.

RMDs are taxed the year you take them at your ordinary income tax rate. You can avoid extra taxes and higher taxable income by donating some or all of your RMD to charity. The IRS currently allows you to donate up to $105,000 annually this way.

No new, but possibly limited time opportunities

It’s worth mentioning that none of these four gifting strategies are new. They’ve all been available for years now. The difference is that you may have a limited time to take advantage of them since many provisions of the TCJA are due to expire at the end of next year.

As always, I recommend touching base with your tax professional before making any big decisions. Happy Holidays!

Brian R. Littlejohn, MBA, CFP®, CFA is the founder of Sherwood Wealth Management, an independent, registered investment advisor (RIA) firm that specializes in inherited wealth. He lives in Aspen and works with clients in the Roaring Fork Valley and beyond.