Russell W. Hall, CFP®, CPWA®

If you, like so many others, are putting off making your charitable donations until it gets closer to the end of the year, we suggest you start on that right away.  This is the busiest time of year for many charities and brokerage firms, and the last thing you want is for a donation to be late and not count toward your 2023 taxes.

Unsure of the best way to donate?  Here are a few ideas.

Give from your IRA

If you’re over 70 ½ and have an IRA (or younger and have an Inherited IRA), you can give up to $100,000 per year away to charity directly from your IRA.  You don’t get to deduct those donations, but since the withdrawal never touches your tax return, your income is lower - and for many people that’s even better than a deduction.  This is called a Qualified Charitable Distribution (QCD).

You may be wondering: if Congress increased the required minimum distribution (RMD) age to 73 and I don’t have to take withdrawals until then, why should I give from my IRA now? 

If you’re not able to itemize deductions – true for many Americans nowadays - doing QCDs can be a great way to give in a tax-advantaged manner.  For some who will have larger required distributions than they might need for living expenses, giving now can also help reduce future required minimum distribution amounts.

Give away gains

Most charities these days are able to receive donations of appreciated assets, so if you’re sitting on unrealized gains in a taxable account, it could make sense to give those gains away instead of giving cash.

We think best practice is to gift investments that you’ve owned for over a year that have a relatively large gain.  Instead of selling that holding to cash and having to pay taxes on the gain, you could gift it to charity and let them sell it to realize the (now non-taxable) gain.  In addition, if you wanted to continue to own the security you gifted, you could then immediately repurchase it and you’d be starting with a new tax basis.

One caveat for generous donors is that you are limited by your Adjusted Gross Income (AGI) when it comes to deducting charitable gifts.  You’re limited to 30% of your AGI if donating to a public charity, versus a 60% limitation if you’re giving cash.  The good news is that the portion you can’t deduct gets carried forward for up to five years. 

Give a lot all at once

What if you’d like to donate appreciated securities or cash, but you are filing the standard deduction and are unable to itemize?  One strategy is to “bunch” deductions, where you’re giving away two or three years worth of donations in one year.  That allows you to itemize in the current year and get the tax benefit of your contributions, and then file standard deduction in the off years.

The downside of that strategy for many people is that they’d like to make regular contributions to organizations they support, and that is where a Donor-Advised Fund (DAF) comes into play. 

These funds are set up as public charities to receive donations and give an immediate tax deduction, but the actual gifts to each charity don’t have to be made all at once.  Instead, you as the donor can instruct (technically advise, hence the name) the fund to donate to the 501(c)3 charity of your choice, whenever you want. 

You only get the one tax deduction at the initial donation, but this strategy lets you bunch deductions and still spread out the actual gifts over time.  There also isn’t a requirement that you give away a certain amount or percentage from the DAF each year, which can be a handy feature as well.

Give wisely

We feel a bit like a broken record here, but will say it again - any decision to donate should start with a charitable intent, not just trying to get a tax deduction.  Giving away $1.00 to charity just to save $0.25 on your taxes is not a good wealth building strategy.  But if you really do want to give it away to charity (and we fully support that!), we hope these strategies will help you.

Schedule a 15-minute discovery call with a fee-only financial advisor if you want help thinking through some of these issues.