Charitable giving is an essential aspect of many individuals’ financial plans, and it plays a crucial role in supporting the work of countless non-profit organizations. By approaching charitable giving strategically, donors can make a significant difference in the causes they care about while also enjoying tax advantages that enhance the impact of their generosity. In 2023, several tax-efficient giving methods are worth considering to maximize your charitable contributions.
This article will provide an overview of popular giving vehicles, such as donor-advised funds, charitable remainder trusts, and charitable lead trusts, along with other tax-smart strategies to help you make the most of your charitable giving in 2023. We will also discuss qualified charitable distributions (QCDs) for those looking to leverage their retirement accounts for philanthropy and tax deduction considerations and resources for further guidance. By employing these strategies and vehicles, you can optimize your charitable impact and enjoy the associated tax benefits.
Direct Giving vs. Charitable Tools: Finding the Right Approach for Your Charitable Contributions
When it comes to making charitable contributions, donors have two main options: making direct donations to charitable organizations or utilizing charitable giving tools, such as donor-advised funds, charitable remainder trusts, and charitable lead trusts.
Direct donations to charitable organizations are straightforward and easy to execute. Donors make a cash or non-cash gift directly to the charity of their choice, and the organization can immediately use the funds for its mission. Anyone can make direct donations regardless of income level or net worth. However, direct donations do not offer the same tax benefits as charitable giving tools.
On the other hand, charitable giving tools can provide significant tax benefits for donors while allowing for greater flexibility and control over the timing and amount of charitable contributions. Donor-advised funds, for example, enable donors to make a charitable contribution to a fund, receive an immediate tax deduction, and then recommend grants from the fund to any IRS-qualified public charity. Charitable remainder trusts and charitable lead trusts allow donors to donate appreciated assets while providing for themselves or their heirs.
While utilizing charitable giving tools may offer more significant tax benefits and flexibility, they have drawbacks. For example, fees may be associated with using a charitable giving tool, and the administrative requirements can be more complex than simply making a direct donation. Additionally, some charitable giving tools may limit the types of charities to which donations can be made.
Ultimately, the decision to make direct donations to charitable organizations versus utilizing charitable giving tools depends on various factors, including the donor’s financial situation, philanthropic goals, and tax considerations. Donors should work with their financial, tax, and legal advisors to determine the best approach for their circumstances.
Donor Advised Funds (DAFs)
DAFs are philanthropic accounts established at public charities, such as community foundations or sponsoring organizations. Donors contribute to their DAFs, receive immediate tax benefits if they itemize their deductions, and recommend grants to their chosen charitable organizations over time. This setup allows donors to carefully consider where to allocate their funds without feeling rushed to decide.
One of the key benefits of DAFs is their tax efficiency. By donating appreciated assets held for more than one year, donors can generally eliminate capital gains tax, potentially increasing the amount available for charities by up to 20%. Moreover, the assets within the DAF can be invested for potential tax-free growth, further amplifying the donor’s impact.
The option to make anonymous donations is another attractive feature of DAFs. Donors who value privacy can recommend grants from their DAFs without disclosing their personal information, ensuring their charitable efforts remain discreet.
Charitable remainder trusts (CRTs)
A CRT is an irrevocable trust that provides income to the donor or other beneficiaries for a specified period, with the remaining assets going to a donor chosen and designated charity. The donor receives a partial income tax deduction upon establishing the trust, and the trust’s assets grow tax-free.
CRTs offer several tax benefits, including a partial income tax deduction for the present value of the future charitable gift and avoidance of capital gains taxes on contributed appreciated assets. The trust’s assets also grow tax-free. CRTs provide income to the donor or other beneficiaries and help reduce estate taxes.
CRTs are best suited for donors who want to support a charitable cause while creating an income stream for themselves or other beneficiaries. They are handy for those with appreciated assets that would otherwise generate significant capital gains taxes if sold.
A Charitable Remainder Trust (CRT) coupled with a Donor Advised Fund (DAF) can alleviate hurdles and provide greater flexibility for donors. For example, naming the DAF as the remainder beneficiary takes the pressure off of identifying the ultimate charity at the start of the CRT. The donor’s family can continue to be involved in the donor’s charitable legacy, and the donor’s financial advisor can continue to oversee the investment management of the remaining assets.
Furthermore, naming the DAF as the remainder beneficiary provides flexibility to the donor and advisor if the advisor or donor changes wealth management firms at some point. The donor can also use the DAF as the vehicle for their lifetime charitable giving by funding it through distributions from their CRT.
If a donor wants to accelerate a CRT to give more to charity now or in the near future, they can cash out their income interest or collapse the CRT entirely into a DAF. In this case, the donor may receive a one-time income tax benefit. In short, the DAF enhances the CRT and provides considerable flexibility to the donor to engage in planned giving on terms that are ideal for them.
Charitable lead trusts (CLTs)
A CLT is the inverse of a CRT. It provides income to a designated charity for a specified period, with the remaining assets ultimately passed to the donor’s heirs. CLTs help reduce estate and gift taxes while supporting charitable causes during the donor’s lifetime.
By removing the trust’s assets from the donor’s taxable estate, CLTs offer estate and gift tax benefits. The trust provides a consistent income stream to a designated charity for a specified period, after which the remaining assets pass to the donor’s heirs, often with reduced or eliminated estate or gift taxes.
CLTs are most appropriate for donors who want to support a charity during their lifetime while also preserving wealth for their heirs. They benefit individuals with substantial estates that would otherwise be subject to estate or gift taxes.
One way to enhance the benefits of a Charitable Lead Trust (CLT) is to combine it with a Donor Advised Fund (DAF). By naming the DAF as the income beneficiary of the CLT, donors and their families can enjoy greater flexibility in directing their charitable giving.
Furthermore, the donor’s financial advisor can continue to manage the investment of the remainder assets.
In essence, a DAF can augment the benefits of a CLT by enabling planned giving during the donor’s lifetime and providing a nest egg for their heirs when the CLT term ends.
Tax Considerations for Charitable Giving
Understanding tax deduction considerations for charitable giving is essential to maximize your tax savings while supporting your favorite causes. This section will provide an overview of deduction limits, itemized vs. standard deductions, and inflation-based adjustments to standard deductions.
Limits on deductions for donations
Charitable contributions must be made to a qualified organization for tax deductions. Starting in 2022, the IRS set the limit for cash contributions at 60% of your AGI, which will remain in effect until 2025. After 2025, cash contributions will be limited to 50% of your AGI. The limit for donating appreciated assets, such as stocks, is 30% of your AGI. Carryover provisions allow you to deduct excess contributions in subsequent years, up to a maximum of five years.
Itemized vs. standard deductions
When filing your taxes, you can either itemize your deductions or take the standard deduction. Itemizing allows you to claim specific deductions, such as mortgage interest, state and local taxes, and charitable contributions. However, if these itemized deductions are less than the standard deduction, it is more beneficial to claim the standard deduction.
Even if you choose not to itemize your deductions, you can still claim a deduction for charitable donations. As of 2023, individual filers can claim a deduction of up to $300 for charitable gifts, while married couples can claim up to $600.
Inflation-based adjustments to standard deductions
The standard deduction is adjusted for inflation each year. For 2023, the standard deduction amounts are as follows:
| Filing Status | Standard Deduction 2023 |
|---|---|
| Single; Married Filing Separately | $13,850 |
| Married Filing Jointly & Surviving Spouses | $27,700 |
| Head of Household | $20,800 |
Source: IRS.GOV
These amounts may increase in future years to account for inflation. It is essential to consider these adjustments when planning your charitable giving strategy and deciding whether to itemize or take the standard deduction.
For taxpayers over 65, there is an additional standard deduction of $1,850 for tax filing status single or head of household or $1,500 per person when filing married filing jointly. The additional deduction is doubled for those over 65 and blind.
| Tax Filing Status, 2023 | Additional Deduction Per Person |
|---|---|
| Single or Head of Household | |
| Aged 65 or older OR Blind | $1,850 |
| Aged 65 or older AND Blind | $3,700 |
| Married Filing Jointly or Separately | |
| Aged 65 or older OR Blind | $1,500 |
| Aged 65 or older AND Blind | $3,000 |
Source: IRS.GOV
These amounts may increase in future years to account for inflation. It is essential to consider these adjustments and the additional deductions for taxpayers over 65 when planning your charitable giving strategy and deciding whether to itemize or take the standard deduction.
Understanding the tax deduction considerations for charitable giving is crucial to maximizing your impact while enjoying tax benefits. You can make informed decisions about your charitable giving and tax planning strategies by considering the limits on deductions, itemizing vs. taking the standard deduction, and inflation-based adjustments.
Funding charitable giving strategies
With an understanding of the various charitable tools available, it’s time to explore some tax-smart philanthropic giving strategies for 2023. These strategies can help you make the most impact with your donations while minimizing your tax liability.
This section will discuss various approaches to enhance your charitable giving, from donating appreciated assets to leveraging retirement accounts and establishing trusts. By employing these strategies, you can create a well-rounded, tax-efficient charitable plan that aligns with your financial goals and philanthropic passions.
Donate appreciated non-cash assets
Donating appreciated assets, such as stocks or real estate, allows you to claim a tax deduction for the asset’s full market value while avoiding capital gains taxes on the appreciation, subject to limitations. Donations can be made directly to the charity or through various combinations of tools we’ve discussed.
Leave a legacy by naming a charity, DAF, or CRT as a beneficiary of IRA assets
You can name a charity or a Donor-Advised Fund (DAF) associated with the charity as the beneficiary of all or a portion of your IRA or employer-sponsored retirement plan. Since the charity or DAF is tax-exempt, it can withdraw the assets from the account without paying income taxes on the distribution after your death.
If you name individuals as retirement account beneficiaries, they will be subject to ordinary income taxes on any distributions they receive. It may be more beneficial to name a charity or DAF as the beneficiary of a retirement account and leave other tax-advantaged assets to your loved ones. Additionally, any amount left to a charity at death can result in an estate tax charitable deduction, reducing any applicable federal estate taxes.
A Charitable Remainder Trust (CRT) can also be named as the beneficiary of an IRA or company retirement plan, which can benefit a charity and a non-spouse family member. The selected individual could receive annual payments for their lifetime or over a fixed period. A Unitrust pays based on a fixed percentage of the CRT balance at the beginning of each year, while an Annuity Trust pays a fixed amount. After the CRT expires, the remaining amount is distributed to a Donor-Advised Fund or charities of your choosing.
The terms of a Charitable Remainder Trust (CRT) involve payments that continue for up to 20 years or the lifetime of one or more beneficiaries. Upon the completion of the payment term, the remaining assets of the trust are passed on to one or more qualified U.S. charitable organizations.
Specific rules dictate the CRT’s operation, such as the minimum percentage of assets charities must receive based on the trust’s beginning balance at termination. A CRT is tax-exempt, similar to a charity, making it a tax-efficient tool. When you name a CRT as the IRA beneficiary, the CRT receives the funds after your death without paying income taxes. The individual selected to receive annual payments will owe income taxes on the amount received, and a partial estate tax deduction is allowed upon the IRA owner’s death. Hiring an attorney is crucial to create it properly due to the complexities of a CRT.
Bunch multiple years of charitable contributions
Charitable giving benefits and strategies include donation bunching, a tax strategy that consolidates your donations for two years or more into a single year to maximize your itemized deduction for that year. Since the Tax Cuts and Jobs Act of 2017 roughly doubled the standard deduction through 2025, the high standard deduction means that itemization is not the best way to maximize tax deductions for most Americans. Donation bunching can increase giving budgets, but it requires planning and execution beyond standard giving practices and may distract from the goal of supporting charitable organizations.
Maximizing Your Charitable Impact with Qualified Charitable Distributions (QCDs)
Individual Retirement Accounts (IRAs) provide an excellent tax-advantaged way to save for retirement while offering opportunities to maximize charitable impact and minimize taxes. Two key strategies to achieve this are making Qualified Charitable Distributions (QCDs) and naming charitable beneficiaries. QCDs allow donors aged 70½ and older to instruct an IRA administrator to send up to $100,000 per year—either all or part of their annual RMD—to one or more operating charities. By sending IRA assets directly to charity, donors can avoid reporting QCDs as taxable income and do not owe taxes on the QCD, even if they do not itemize deductions. Sometimes, QCDs may offer more significant tax savings than cash donations with claimed charitable tax deductions. Generally, qualified charitable distributions (QCDs) cannot be directed to donor-advised funds or life-income gifts, such as charitable remainder trusts or gift annuities, although new legislation has changed the rules and allows for a one-time exception.
New Legislation for QCDs
The tax benefits of Qualified Charitable Distributions (QCDs) have been enhanced with the new SECURE 2.0 legislation. Two significant improvements have been made to the QCD benefits.
Firstly, before the new law, the $100,000 limit for QCDs was not indexed for inflation. Starting in 2024, the $100,000 limit will be indexed annually for inflation. This means that you and your spouse can make larger contributions in the future.
Secondly, beginning in 2023, you can include a one-time gift of up to $50,000 to a split-interest equity, such as a charitable remainder trust (CRT) or charitable gift annuity (CGA), in your QCD. The $50,000 limit will also be indexed for inflation starting in 2024.
A Charitable Remainder Annuity Trust (CRAT) or a Charitable Remainder Unitrust (CRUT) can be used for the Charitable Remainder Trust (CRT). A CRAT requires the payment of a fixed amount of at least 5% of the initial value of the trust property, while a CRUT requires the payment of a fixed percentage (not less than 5%) of trust assets.
A CGA is a similar arrangement where you make a substantial gift to a charity and designate a beneficiary to receive a stream of income during their lifetime, with the donor being the annuity recipient.
More Charitable Gift Funding Planning Ideas
Give private business interests: Donating private business interests to charity can provide significant tax benefits, including a potential income tax deduction and a reduction in estate taxes.
Contribute restricted stock: Donating restricted stock can provide a tax deduction based on the stock’s fair market value on the date of the gift while avoiding capital gains taxes.
Combine charitable giving with investment portfolio rebalancing: Donate appreciated assets as part of your regular portfolio rebalancing, which can help manage your investment risk and provide tax benefits.
Offset tax liability when converting a retirement account to a Roth IRA: You will owe taxes if you convert a traditional IRA to a Roth IRA. You can offset some of the tax liability by making a charitable donation in the same year.
Offset tax liability on a retirement account withdrawal: Making a charitable donation in the same year as taking a taxable retirement account withdrawal can help reduce the tax burden associated with the withdrawal.
Satisfy an IRA Required Minimum Distribution (RMD) through a non-taxable Qualified Charitable Distribution (QCD): If you are 70½ or older, you can make a QCD from your IRA to a qualified charity, which can help satisfy your RMD and avoid taxes on the distribution.
The importance of a well-planned charitable giving strategy
Charitable giving is a complex area with many tax implications, and it’s essential to consult with financial, tax, or legal advisors before making any significant philanthropic contributions. An experienced financial planner, accountant, or estate planning attorney can help you determine the most tax-efficient giving strategies for your unique financial situation and goals. Additionally, these professionals can guide the use of various charitable giving vehicles, such as donor-advised funds, charitable remainder trusts, and charitable lead trusts, and help you evaluate the tax implications of each.
A well-planned charitable giving strategy can maximize the impact of your giving while minimizing your tax liability. By taking advantage of tax-smart giving approaches, you can make a meaningful difference in the causes you care about while benefiting from valuable tax deductions and other incentives.
Maximizing impact while enjoying tax benefits
With some planning and professional guidance, anyone can become a tax-smart philanthropist. By donating to charities that align with your values and leveraging tax-efficient giving strategies, you can maximize the impact of your giving and help create a better world for generations to come.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used or relied on, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Entities or persons distributing this information are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
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Last updated: November 6, 2023
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