Year-End Tax Planning:  Lowering Your Tax Bill with Charitable Giving

As we quickly approach the end of the year, some of you may be considering what you can do to lower your tax bill for 2023.  One possibility is to increase your charitable giving, though your generosity will only impact your taxes if you itemize deductions on your tax return and/or can fulfill some of your required minimum distribution by giving directly from your IRA.  Since the 2018 tax law significantly increased the standard deduction, many taxpayers may no longer itemize or may benefit from bunching charitable giving and just itemizing every other year.  Another tax-efficient alternative for those over age 70 ½ is to make Qualified Charitable Distributions from their IRAs, as we discuss in more detail below.

Itemizing Deductions.  Most taxpayers are aware that they have two options for deductions against their taxable income on their annual tax return—itemizing deductions (which includes a combination of state income and property taxes paid, mortgage interest paid, charitable giving, and possibly medical expenses) or taking the standard deduction.  As we discussed back in 2017, the 2018 tax law doubled the standard deduction, so many Americans who previously itemized deductions began to take the standard deduction instead.  (For 2023, the standard deduction is $13,850 for single filers and $27,700 for joint filers, so you will only choose to itemize deductions if they exceed these levels.)  If you take the standard deduction, your charitable giving will typically not have any tax benefit.

Depending on the level of your other itemized deductions, you may want to consider a strategy in which you bunch charitable giving into certain tax years and take the standard deduction in the off years.  For example, if you normally give $15,000 per year to charity, plan instead to give $30,000 in 2023 (in order to benefit from itemizing deductions) and then do not give anything in 2024 and take the standard deduction instead. 

This can certainly be accomplished by just giving cash to a particular charity every other year.  However, if you have appreciated securities (i.e. investments that have grown a lot since you purchased them) in a taxable account, you may want to facilitate tax-efficient charitable giving by donating appreciated securities directly to the charity (to avoid paying capital gains tax) or through a donor-advised fund (DAF).  In the case of a DAF, investors donate securities to the DAF and then “advise” that the DAF give grants to their favorite charities.  Investors can deduct on their taxes the fair market value of the securities at the time that they donated them to the DAF, avoid paying capital gains tax on the appreciation, and choose when to distribute funds from the DAF (giving from the DAF does not have to take place in the same tax year as the contributions). 

Qualified Charitable Distributions.  If you are over age 70 ½, another potential vehicle for charitable giving is qualified charitable distributions (QCDs).  Instead of paying ordinary income tax on your IRA withdrawals and then giving after-tax money to charity, you can make donations to charities directly from your IRA with pre-tax money.  This strategy is particularly valuable for those over age 73 who are subject to required minimum distributions (RMDs) from their IRAs.  If done correctly, the QCD amount will be excluded from your adjusted gross income but will still count toward fulfilling your RMD. 

Note that you cannot itemize charitable giving done through QCDs, and the gifts must be transferred directly to a charity from one’s IRA, not through a Donor Advised Fund or private foundation (no double dipping on tax breaks!).  The limit on QCDs is $100k per year (which will be indexed for inflation starting in 2024), but for most investors, that constraint is not a problem.

Many academic studies have demonstrated the increased satisfaction and joy that comes with being generous, and, of course, the potential tax breaks don’t hurt either.  Being strategic in your charitable giving could lower your tax bill in 2023 and beyond, so give us a call to see if any of these options would be beneficial for you.