With a weak stock market, rising inflation and high interest rates, charitable giving may seem less attractive. But here are some ways to make giving work for both you and the charity.
Take a step back and see where you want to give and how much you can give. Next, take a look at your personal tax situation. With the split in Congress, there are unlikely to be major tax changes on the horizon that require strategy, said Pam Lucina, chief fiduciary officer and head of trust practice and consultant at Northern Trust Wealth Management.
The 2022 deduction limits for donations to public charities are 30% of gross income adjusted for non-cash asset contributions, if assets have been held for more than one year, and 60% of gross income adjusted for cash contributions. Contribution amounts exceeding these limits can be carried forward up to five subsequent tax years.
And with inflation, charities are feeling the pinch just like consumers.
“Charities still need funding, even more so in this environment. Charities need money more than ever,” said Marie DeCaprio, partner, wealth advisor at Sax Wealth Advisory. “There are some ways to give that stand the test of time.”
“People want to hang on to cash. So, gift shares that you may have received yourself or inherited,” DeCaprio said. “If you gift those shares, you won’t have to realize the capital gain.”
Donate non-cash goods
Another strategy for maximizing charitable giving and minimizing taxes is to donate valued non-cash assets that you’ve held for more than a year. This strategy allows you to eliminate the capital gains tax you would otherwise incur if you sold the assets first and donated the proceeds.
Long-term capital gains tax is typically 15% or 20%, depending on your income level. Eliminating this tax can increase the amount available to charities by up to 20%.
“People give cash instead of stock because they think it’s complicated. But charities are very used to it. And there is a real benefit to avoiding capital gains tax,” Lucina said. “Of course, taxes aren’t the only reason to give charity.”
Also, given the downturn in the market, not everyone appreciated the shares to give to charity. In the case of diving stock, it’s better to take the loss yourself and apply it to your income than to give lower-value shares to charity, Lucina said.
Group your contributions
Charitable contributions are tax deductible only for people who itemize their taxes, rather than taking the standard deduction. The standard deduction is $12,950 for single filers and $25,900 for joint filers in 2022.
To help pass the standard deduction threshold, you might consider “bundling” charitable contributions. For example, instead of donating $10,000 to a charity every year, you could donate $20,000 in 2022 and skip donating next year.
This strategy allows you to receive a tax benefit for the gift in 2022. Then you simply take the standard deduction on your 2023 tax return.
Consider a donor announcementbackground for vision
Your contribution to a donor-recommended fund will be deductible for 2022, but you can determine the grants at a later time. This gives you time to determine how and when to split the actual donation.
Take a qualified charitable distribution
Investors age 70½ and older can direct up to $100,000 a year from a traditional IRA to a charity through qualifying charitable distributions. The QCD can be used to meet all or part of the required 2022 minimum distributions and the amount is not considered taxable income.
The money has to go directly from the IRA account to the charity and never touch your hands, said Eric Bond, wealth advisor at Bond Wealth Management.
Two persons filing income tax returns with joint marriage declarations each qualify for an annual QCD of up to $100,000. Also, QCDs don’t require you to specify. This means you can use a higher standard deduction, but still use a QCD for charitable donations.
Gifts through an IRA conversion
If you have a traditional IRA, you can use charitable donations to offset the tax liability on the amount withdrawn and convert it into a Roth IRA. However, you must be over the age of 59 1/2 to avoid an early withdrawal penalty.
Do not delay
Even though you can give to charity all year long, people tend to make it an end-of-year assignment, Lucina said. That said, there isn’t much time to get these tasks done by the end of the year, and brokerage firms tend to be inundated with year-end inquiries. So, don’t delay.
“Do it as soon as possible. And be sure to check that the check has been received and cleared by the charity before the end of the year,” DeCaprio said. “You don’t want to wait until the last minute.”