Persistent inflation and high interest rates continue to drive up costs and negatively affect charities. As a result, using an efficient, tax-smart approach to maximize the impact of your charitable giving has never been more important.
Here are 12 ways to increase your giving power while potentially reducing your taxable income this year and beyond.
1. Donate appreciated non-cash assets instead of cash
If you're thinking about selling appreciated publicly traded securities, real estate, or other non-cash assets and donating the proceeds, consider gifting the assets directly to the charity instead. Generally, you can eliminate the capital gains tax you would otherwise incur from selling the assets—as long as you've held them more than one year—and claim a charitable deduction1 for the fair market value of the assets.
Eliminating the capital gains tax can increase the amount available for charities by up to 20% as well as boost your deduction.2 Let's take a look at how this strategy would work if you owned stock XYZ with a current value of $50,000.
Donating stock assets vs. after-tax sale proceeds
This example is hypothetical and for illustrative purposes only. The example does not take into account any state or local taxes or the Medicare net investment income surtax. The tax savings shown is the tax deduction, multiplied by the donor's income tax rate (24% in this example), minus the long-term capital gains taxes paid.
You decide to sell XYZ stock, which has a cost basis of $5,000, and donate the proceeds to charity. After paying a 15% long-term capital gains tax of $6,750 ($45,000 x 15%), your charitable gift would be $43,250. At a tax rate of 24%, you would save $3,630 ($43,250 x 24% – $6,750) in taxes.
By donating XYZ stock instead, you wouldn't owe long-term capital gains tax—saving you $12,000 ($50,000 x 24%) in taxes and allowing you to gift the full $50,000 value, a win-win situation for both the charity and you.
2. Combine tax-loss harvesting with a cash gift
If your publicly traded securities have declined below their cost basis, you could sell those securities at a loss and donate the proceeds to claim a charitable deduction. Through a process called tax-loss harvesting, you could use your capital losses to offset capital gains, up to $3,000 of ordinary income, or both. You may then carry forward any remaining loss amount to offset gains and income for future tax years.
3. Give private business interests
While publicly traded securities are the most commonly donated non-cash assets, C-Corporation, Limited Partnership (LP), or Limited Liability Company (LLC) interests could make good gifts as well. This is especially true if the interests have been held more than one year, appreciated significantly over time, and retained more value than other assets you're considering donating.
Giving a percentage of a privately held business interest can generally eliminate the long-term capital gains tax you would otherwise incur if you sold the assets first and donated the proceeds. Plus, you can claim a charitable deduction for the fair market value of the asset, as determined by a qualified appraiser.
The Difference Between Public & Private Companies
4. Contribute restricted stock
Generally, restricted stock cannot be transferred or sold to the public—including public charities—until certain legal and/or regulatory conditions have been met. However, once all restrictions have been removed, you can donate your appreciated restricted stock to a charity—which can then sell it, no holds barred. Gifting your restricted stock can help you eliminate long-term capital gains tax on the appreciation, and you can deduct the asset's value at the time of donation.
5. Bunch charitable contributions in one tax year
If you anticipate your total itemized deductions will be slightly below your standard deduction amount, you can combine or "bunch" contributions for multiple years into a single tax year. With this bunching strategy, you would itemize deductions on your current tax return and take the standard deduction on your future return to potentially produce a larger two-year deduction than you would get by claiming two years of standard deductions.
Here's an example of how a married couple with no children could have claimed an additional $7,900 in tax deductions by bunching their annual contributions of $10,000 for both 2022 and 2023 on their 2022 tax return.
Taking the standard deduction vs. bunching giving
Standard deduction amounts are for married filing jointly. This example is hypothetical and for illustrative purposes only.
Bunching three or more years of contributions together may further increase your tax savings.
6. Combine charitable giving with investment portfolio rebalancing
Rebalancing often involves selling appreciated investments that have exceeded target allocations and using sale proceeds to buy more of the assets that have become underrepresented in a portfolio. To potentially reduce the tax impact of rebalancing, you can use a part-gift, part-sale strategy. This involves donating long-term appreciated assets in an amount that offsets the capital gains tax on the sale of appreciated assets and claiming a charitable deduction.
7. Offset taxes on a Roth IRA conversion
Converting a tax-deferred retirement account, such as a traditional IRA, to a Roth IRA can provide potential tax-free growth, tax-free withdrawals,3 and no annual required minimum distribution (RMD) as well as eliminate the tax liability for beneficiaries (if account assets are passed to heirs). A Roth conversion also carries tax implications, but by making a donation in the amount you converted and claiming a deduction, you may be able to reduce your tax bill.
8. Minimize taxes on a retirement account withdrawal
Charitable deductions may also help lower taxes on withdrawals, including RMDs, from your tax-deferred retirement accounts. Taking a distribution offers the additional tax benefits of potentially reducing your taxable estate and the tax liability for account beneficiaries. But remember, you generally need to be over age 59½ to avoid an early withdrawal penalty.
9. Establish a charitable trust
Another tax-smart way to give is through a charitable remainder trust or a charitable lead trust. Both irrevocable trusts can be funded with a gift of cash or non-cash assets. The difference between the two types is when you want your donation to go to charity.
With a charitable remainder trust (CRT), you or another noncharitable beneficiary would receive payments for a set number of years or for life. At the end of the term or upon death of all noncharitable beneficiaries, the remaining assets will be gifted to the public charity of your choice. You may claim a charitable deduction for the year you fund the trust. The deduction amount is typically based on the present value of the assets that will eventually go to the named charity.
With a charitable lead trust (CLT), the charity receives income from the trust for a specified term, after which the remaining assets will be distributed to an individual or multiple people. Your tax benefits will depend on the trust structure.
10. Name a charity as an IRA beneficiary
Unlike individuals who inherit traditional IRAs, public charities don't have to pay income tax on bequeathed assets at the time of withdrawal, making them ideal beneficiaries of IRA assets. Every penny of the donation will be directed to support your charitable goals beyond your lifetime. What's more, designating a charitable remainder trust as your IRA beneficiary will combine a gift to charity with income to your heirs.
11. Supplement your giving strategy with a donor-advised fund
In any of the 10 strategies listed above, you may be eligible for a charitable deduction by contributing cash and non-cash assets to a donor-advised fund. This account allows you to invest contributions for potential tax-free growth and to recommend grants at any time to public charities of your choice. You can name your donor-advised fund as a charitable beneficiary of IRA assets or as the remainder beneficiary of a charitable trust as well.
12. Satisfy an IRA RMD through a QCD
A qualified charitable distribution (QCD) doesn't qualify for a charitable deduction, but using one to satisfy all or part of your annual RMD can help lower your tax bill and meet your philanthropic goals. A QCD is nontaxable income, and individuals age 70½ and older can direct up to $100,000 per year (up to $200,000 for married couples filing jointly) from their IRAs to operating charities,4 not including donor-advised funds.
As part of the recently passed SECURE Act 2.0 legislation, the annual QCD limit will be adjusted for inflation starting in 2024. The new law also allows you to direct a one-time, $50,000 QCD to a charitable remainder trust or charitable gift annuity in 2023.
Sharing the wealth
Consider making charitable giving part of your financial plan. Your investment, tax, and legal advisors can help you determine the best strategies to amplify your generosity.
1Donations are deductible for donors who itemize when filing their income tax returns. Overall deductions for donations to public charities, including donor-advised funds, are generally limited to 50% of adjusted gross income (AGI). The limit increases to 60% of AGI for cash gifts, while the limit on donating appreciated non-cash assets held more than one year is 30% of AGI. Contribution amounts in excess of these deduction limits may be carried over up to five subsequent tax years.
2The long-term capital gains tax is typically 15% or 20%, depending on the donor's income level.
3Roth IRA conversions require a 5-year holding period before earnings can be withdrawn tax free, and subsequent conversions will require their own 5-year holding period. In addition, earnings distributions prior to age 59½ are subject to an early withdrawal penalty.
4Operating charities, or qualifying public charities, are defined by Internal Revenue Code section 170(b)(1)(A). Donor-advised funds, supporting organizations, and private foundations are not considered qualifying public charities.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
A donor's ability to claim itemized deductions is subject to a variety of limitations, depending on the donor's specific tax situation. Donors should consult their tax advisors for more information.
Schwab Charitable does not provide specific individualized legal or tax advice. Please consult a qualified legal or tax advisor where such advice is necessary or appropriate.
Neither the tax-loss harvesting strategy, nor any discussion herein is intended as tax advice, and Schwab Asset Management does not represent that any particular tax consequences will be obtained. Tax-loss harvesting involves certain risks including unintended tax implications. Investors should consult with their tax advisors and refer to Internal Revenue Service ("IRS") website at www.irs.gov about the consequences of tax-loss harvesting.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc., a subsidiary of The Charles Schwab Corporation.0523-3GXR