2023 Year-End Tax Planning: Charitable Contributions

Update on how to leverage charitable giving to reduce your taxable income

As the year draws to a close, we want to provide an update on how to leverage charitable giving in order to reduce your taxable income for 2023. For many high wealth taxpayers, the use of charitable contribution planning may be one of the few discretionary planning methods left to help reduce their tax liability.

Bunching charitable contributions into one tax year

Beginning with tax year 2018, the Tax Cuts and Jobs Act (TCJA) roughly doubled the standard deduction for all taxpayers (for joint filers in 2023 the deduction is $27,700). This change, coupled with the $10,000 deduction limit for state and local taxes, means many taxpayers find they are no longer itemizing, but rather claiming the standard deduction.

With the increase in the standard deduction, one strategy to maximize the tax benefits from charitable giving is to make a couple of years’ worth of contributions in one tax year, so that your itemized deductions in that tax year exceed the amount of the standard deduction. In the years that follow, you would not make any charitable contributions but again claim the standard deduction.

It is expected that the standard deduction will go back down to pre-2018 levels for 2026 when many of the TCJA provisions sunset. As such, if you do decide to bunch your contributions, we would recommend that you not make more than three years’ worth of contributions if such contributions are made in 2023.

Tax savings with a donor advised fund

Many taxpayers may not be comfortable with the above bunching strategy because they do not like the idea of paying more than one year’s worth of contributions to charity at one time. In addition, taxpayers’ philanthropic interests often shift from year to year.

If this is the case, to accomplish the bunching strategy, taxpayers should consider setting up and contributing to a donor advised fund (DAF). A DAF is a fund sponsored by a public charity that allows donors to make one (often sizable) contribution to the DAF, receive a current year tax deduction for the contribution, and then recommend grants from the DAF to their favorite charities over time, often over many years.

DAFs are an especially efficient tax planning vehicle when there is a year in which you have unexpectedly high income and even more so when that income is considered ordinary and taxed in the highest tax brackets.

There is a stacking rule built into our current tax code which means that itemized deductions first shelter ordinary income items such as interest income and wages, and then second, they offset qualified dividends and long-term capital gains. With proper planning, a taxpayer could potentially offset all ordinary income items and just pay tax on their qualified dividends and long-term capital gains at the current 0%, 15% and 20% federal tax rates.

Give appreciated long term securities

Whether or not you give directly to the charity or to a DAF, keep in mind one of the most tax efficient methods for making a charitable contribution is to make the contribution using long term appreciated securities.

If the security has been held for more than 12 months, a taxpayer that makes a charitable contribution using appreciated securities receives a tax deduction for the FULL fair market value of the security and does not have to pay income tax on the built in appreciation contained in the security. Keep in mind the deduction for contributions of appreciated securities is limited to 30% of adjusted gross income (AGI), while contributions of cash have higher AGI limits. For donations of appreciated securities made to a private foundation, the donation is limited to 20% of your AGI. If your donation exceeds the AGI limits, the excess charitable deduction can be carried forward for up to five years.

Note that the above discussion assumes the charitable donation will consist of long term publicly traded securities. If the donation is not a publicly traded security, additional rules must be followed, including obtaining a qualified valuation of such donation.

Use your IRA account to manage charitable contributions

With the increase in the standard deduction amounts discussed earlier, Qualified Charitable Distributions (QCDs) from IRA accounts have become an even more important tool for qualifying individuals to manage their charitable contributions.

A QCD is an otherwise taxable distribution from an IRA owned by an individual that is over the age of 70 ½ that is instead directed to a qualified charity. The amount directed to the charity is not taxable income to the individual. Taxpayers over 70 ½ can make QCDs of up to $100,000 per tax year. QCDs also reduce the amount of the Required Minimum Distribution (RMD) in a given tax year.

For qualifying individuals, making a qualified distribution allows those who are now taking the standard deduction to still reap a direct tax savings by giving to charity. It should be noted that QCDs cannot be used to make contributions to DAFs.

Keep in mind that the $100,000 limit is an annual limit, and any unused amount cannot be carried forward to a future year.  The $100,000 annual limit will be indexed for inflation beginning with tax year 2024.

Each person’s tax situation is unique. We can help you narrow down the specific actions that you can take to fit your needs for successful tax planning this year. Contact your Keiter Opportunity Advisor or Email | Call: 804.747.0000 for advice on charitable deduction tax planning opportunities.