The year-end means giving gifts to friends and loved ones for the holidays and considering charitable giving. It’s your last chance to give to an organization you want to support and get the bonus of a tax break for the current year. There are multiple ways to participate in charitable giving, ranging from making a small donation online to giving large sums through qualified distributions, foundations and gift annuities.
“As you evaluate your many options for charitable giving this holiday season, consider the tax implications. 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®.
The first step is to know 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 expected 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 pledging, go ahead and make your 2024 gifts before year-end to maximize the tax benefit,” said Bridges.
Charitable giving options
Bridges suggests considering these seven tax-wise ways to give:
- Direct cash donations. Charities are always happy to accept cash through websites and fundraisers. Donors can claim a deduction on their income tax returns, reducing their taxable income and overall tax liability. But remember that other strategies – such as giving appreciated assets – may provide additional tax benefits, leaving cash donations as a less effective option.
- Donor-advised funds (DAFs). Suppose you expect to be in a high tax bracket this year because you realized extra income through the sale of assets, a Roth conversion, or a significant bonus. In that case, you may want to lower your taxable income by making a gift to a DAF. You get the tax benefit the year you create the DAF, but it buys you some time to decide which organizations to gift the money. Assets in a DAF can also grow tax-free, potentially increasing the overall amount available for charitable giving.
- A foundation. Consider donating to a charitable foundation aligned with your values. Charitable foundations are legal entities established to support other charitable organizations financially. Examples include the United Way, and local community foundations such as the Tulsa Community Foundation.
- A charitable gift annuity (CGA). You contract with a charity to give them a lump sum, but you get a portion back every year for the rest of your life to have a long-term income stream. Any money left over when you pass away goes to the charity. Tax benefits include a deduction for the value of the gift the year the CGA is created. A portion of the yearly payments may be considered a tax-free return on principal and have the potential to reduce capital gains taxes on the appreciated assets.
- Gifts of appreciated assets. If you have stocks and bonds, real estate, artwork or collectibles you want to put to another use, rather than selling them, paying capital gains taxes and then making a gift of after-tax dollars, consider donating the appreciated assets directly to your favorite charities. You will benefit by deducting the total value of the asset, unreduced by taxes, and the charity will benefit by receiving the total value. Note: not all charities can accept all types of assets, so check with them in advance, and you should start the process well before year-end to ensure the transaction is completed before December 31.
- Charitable trusts. This is a legal arrangement in which assets are put into an irrevocable trust to benefit a charity for a set number of years or the donor's life. When the time is up, the remaining assets go to the donor or assigned beneficiary. There are two types: Charitable Remainder Trusts (CRT) and Charitable Lead Trust (CLT), each with its features and tax advantages.
- Qualified Charitable Distributions (QCDs). If you are over 70½, you can make a QCD from your IRA directly to a qualified public charity of up to $100,000/year and it can count towards your RMD, if applicable. Starting this year you may elect to use part of this QCD limit to make a one-time gift of up to $50,000 to fund a charitable remainder annuity trust, charitable remainder unitrust or a charitable gift annuity. You do not need to itemize deductions to benefit from the exclusion. Still, the amount must be sent directly from the custodian of your IRA account to the charity without passing through your hands.
Be mindful of year-end deadlines
Remember, some of these options take time to create with an estate lawyer and your financial advisor, so they aren’t all last-minute, end-of-year decisions. However, if you have an existing charitable trust that allows additional contributions, you may be able to make additional gifts before year-end.
“Don’t forget that to receive a charitable deduction for this year, the gift must be made by December 31,” Bridges said. “That means it has been delivered to the charity, and you have relinquished control.”
A check must be mailed or handed over to the charity—and it’s okay if they don’t cash it until 2024. You should also note that December 31 is a Sunday 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.
Leave a lasting legacy
Bridges says charitable giving is a great way to align your money with your values and leave a lasting legacy. Some families choose to start a Donor Advised Fund and include their children and grandchildren in selecting which organizations they will make grants to. Others take legacy giving to the next level by starting their family charitable foundation.
Consult with your financial advisor on which options serve your needs for tax advantages, creating passive income streams and legacy planning. and how to time it to get the tax benefits you want.
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.