Make your list and check it twice. It's the time of year when gift giving is on our mind—and many of our churches and charities are seeking pledges to fund another year of efforts. Before sending your contribution checks, consider all the options.
"As you are evaluating your many options for charitable giving this holiday season, consider the tax implications of doing so. Certain giving strategies could help you maximize the amount that goes to charity and minimize your tax bill," said Kimberly Bridges, director of financial planning for BOK Financial®.
In this season, she said it's wise to consider your current marginal tax bracket (the rate you will pay on your last dollar of income) and compare it to your expectations for next year. If your marginal tax rate is higher this year than you expect it to be next year, you may want to front-load some or all of next year's contributions before the end of this year.
"In other words, instead of simply making a pledge, go ahead and make your 2023 gifts before year-end to maximize the tax benefit," she said.
Bridges suggests considering these tax-wise ways to give:
- Qualified Charitable Distributions (QCDs). If you are over 70 ½, you can make a QCD from your IRA up to $100,000. The distribution will be excluded from income, thus lowering your adjusted gross income (AGI). You do not need to itemize deductions to benefit from the exclusion, but the amount must be sent directly from the custodian of your IRA account to the charity without passing through your hands.
- Donor advised funds (DAFs). DAFs allow you to front-load several years' worth of planned charitable gifts into a year that will give you the greatest tax benefit. If you expect to be in a high bracket this year because you realized income from the sale of assets, a Roth conversion or a significant bonus, you may want to lower your taxable income by making a gift to a DAF. You may then spread out the grants to your preferred charities over several years, if desired.
- Gifts of appreciated assets. Appreciated assets could include a variety of holdings from stocks and bonds to real estate, artwork and collectibles. Rather than selling your appreciated assets, realizing capital gains and then making a gift of after-tax dollars, consider donating the appreciated assets directly to your favorite charities or to a DAF. You will benefit by deducting the full value of the asset, unreduced by taxes, and the charity will benefit by receiving the full value. Win-win.
- Charitable trusts. There are many ways to maximize the tax benefits of charitable gifts through the use of charitable trusts. But trusts take time to create, and that process needs to begin earlier in the year. However, if you have an existing charitable trust that allows additional contributions, you may be able to make additional gifts before year-end. Remember, the best gifts are gifts of appreciated assets.
- Cash. While it is perfectly acceptable to give cash gifts, and charities will be more than happy to accept them, keep in mind that cash gifts are the least tax-wise form of giving. It is always better to give appreciated assets, if available, to reduce your overall tax obligation.
"Don't forget that in order to receive a charitable deduction for this year, the gift must be made by Dec. 31," Bridges said. "That means it has been delivered to the charity and you have relinquished control."
In the case of a check, it must be mailed or handed over to the charity—and it's okay if they don't cash it until 2023. You should also note that Dec. 31 is on a Saturday this year, so plan accordingly. In the case of securities, the gift is not complete until ownership is changed in either the corporation or broker's records. So make sure you check ahead for their cut-off dates.
Making sense of QCDs from IRAs
If all of the acronyms are running together, Jacob Jackson, Private Wealth IRA officer at BOK Financial, breaks down what you need to know about charitable giving from an IRA:
- IRA owners need to remember that most beneficiaries inheriting an IRA are now required to withdraw all money within 10 years of receiving it. Learn more here.
- The ability to make a Qualified Charitable Distribution (QCD) starts at the age 70 ½.
- You can contribute up to $100,000 per year from an IRA directly to a charity.
- QCD applies to both IRA owners during their lifetime as well as inherited IRA owners.
- QCDs count toward your required minimum distribution if you are over 72 (if the amount is not included as income to the IRA or inherited IRA owner).
Please note: If you are planning to do a QCD from an IRA, you should not make post-70 ½ contributions to the same IRA (assuming you are eligible to make contributions after 70 ½) to avoid causing the QCDs to be disqualified and create a record-keeping headache.
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