Tax Advantaged Strategies for Year-End Giving

As the holidays approach, you may be preparing to make gifts to charity or family.  Although your primary reason for giving may be motivated by a desire to support loved ones and causes dear to you, consider making the most of your gifting dollars by employing one or more of the tax advantaged strategies outlined below.

AGI Limitations on Deductions for Charitable Gifts.  As you plan your giving this year, be aware that charitable donations may be limited by your income, the type of organization receiving the gift, and the type of gift.  In 2022, gifts to a public charity are limited to 30% of adjusted gross income (AGI) when donating long term gain assets, such as stocks, and 60% of AGI for cash contributions.  Gifts to a private foundation are limited to 20% of AGI for long-term capital gain assets and 30% for cash gifts.  Note that contributions in excess of the deduction limits may be carried over for up to five years.

Contribute Appreciated Securities. If you have an investment portfolio of stocks or mutual funds with long-term capital gains, consider donating securities directly to charity instead of writing a check or giving cash.  Donating securities with large long-term capital gains allows you to deduct the fair market value of the security without paying income tax on the unrealized gain, and the charity receives the full value of the gift.   Not only is this a tax efficient way to maximize your donation, but it also offers the opportunity to rebalance your portfolio or diversify a concentrated position without the tax liability.

Bunch your donations into one tax year.  Changes to federal tax laws in 2017 increased the standard deduction and established limits on certain itemized deductions, leaving many donors unable to deduct their charitable contributions.  If your itemized deductions are not high enough to exceed the standard deduction ($12,950 for an individual and $25,900 for couples in 2022), consider ‘bunching’ two- or three-years’ worth of charitable donations into one year if you have the financial resources to do so.

For example, instead of making a charitable contribution this year, make your 2022 contribution in January 2023 and planned 2023 contribution in December of 2023.  By combining two years’ worth of donations, your itemized deductions may exceed the standard deduction threshold.

A Donor Advised Fund (DAF) offers flexibility. A DAF is a giving account established with a non-profit sponsor organization, such as a community foundation, university, religious organization, or financial institution, such as Fidelity or Schwab.  The greatest advantage of a DAF is the immediate tax benefit.  A DAF allows you to contribute cash, stock or other assets and receive a full tax deduction in the year of the gift, but your grants to charity can be spread out over several years.  A DAF is a good vehicle for giving appreciated stock or using the bunching strategy outlined above.

Consider a Qualified Charitable Distribution (QCD) from your IRA. If you are 70 ½ or older, making a QCD from your traditional or inherited IRA allows you to distribute up to $100,000 per year directly to a public charity.  With a QCD, you do not receive a deduction for the gift, but it will not be included as income on your tax return.  Since the QCD is not reported as income or as a deduction it is not counted against annual charitable limits and does not require itemizing deductions.  If you are over age 72, all or part of your required minimum distribution (RMD) can be used for a QCD.  Be aware that QCDs cannot be made to donor-advised funds or private foundations.  Before making a QCD, check with the organization to ensure it is qualified to accept QCDs.

Make full use of the annual gift exclusion.  The annual gift exclusion allows you to make tax-free gifts to an unlimited number of family members or friends each year.  The 2022 annual exclusion amount is $16,000 for individuals and $32,000 for married couples. A couple with two children and four grandchildren could make a total of $192,000 tax-free gifts to them this year.  If the size of your estate is bumping up against, or exceeds your lifetime gift and estate tax exemption, making full use of the annual gift exclusion is a simple, yet powerful tax-saving technique.  For 2022, the lifetime gift exemption is $12.06 million for individuals and $24.12 million for married couples.  Giving cash or other assets that have little or no built-in gains is the most efficient way to gift during your lifetime.

Tuition and medical payments made on behalf of another are tax free.  Paying a child or grandchild’s medical or tuition expenses is another way to make a tax-free gift. Payments made directly to an academic institution for tuition, or medical services provider, such as doctor or hospital, are not considered taxable gifts. Similar to annual exclusion gifts, these payments do not count towards your lifetime gift and estate tax exemption.

As with all tax and estate planning matters, please confer with your tax or wealth advisor to determine the best strategy for your specific tax situation.