Chris Ruedi: Consider tax-smart charitable donations before the end of 2023

Fortunately, you can be generous in ways that can also help lower your tax bill. If you’re thinking of donating to your favorite charity in Q4, here are some tips on how to make a difference while reducing the impact on your wallet:

1. “Bunching” charitable contributions. The Tax Cuts and Jobs Act of 2017 significantly raised the standard deduction, which makes it less worthwhile for some taxpayers to itemize. For example, the standard deduction this year is $13,850 for individuals and $27,700 for married couples filing jointly.

However, you can work around this by “bunching” two or three years’ worth of donations into one year. Depending on your personal situation, bunching may enable you to itemize your deductions this year and take the standard deduction next year(s), helping you reduce your taxable income for 2023.

2. Establishing a charitable trust. There are two types of trusts you can create — a charitable remainder trust, or CRT, or a charitable lead trust (CLT). Both trusts are irrevocable. According to the IRS, a CRT allows you to defer income taxes on the sale of any assets transferred to the trust, provides you with a predictable income for a time you designate, and may allow you to take a partial charitable deduction based on the value of the charitable interest in the trust.

A CLT often works in the reverse, enabling you to support a charity or charities financially for a period of time, with any assets left going to your beneficiaries. This type of trust, according to Investopedia, can be used to reduce a beneficiary’s potential transfer taxes when they inherit the proceeds.

3. Using a donor-advised fund. The National Philanthropic Trust summarizes donor-advised funds, or DAFs, as a way to “Give when you can. Grant when it’s needed.” In other words, you can make a charitable contribution and receive an immediate tax deduction but decide which charity should receive the funds at a later date. You can also invest the funds in your DAF, and any investment growth is tax-free.

4. Donating appreciated stock. Appreciated stock is a great way to donate a potentially large sum to charity. The maximum capital gains tax rate is 20% on long-term holdings, so if the stock you donate has appreciated for longer than a year, the value equals 20% more than if you just sold the stock and donated cash.

When you directly donate stock you’ve held for more than a year, you won’t pay capital gains, and you can deduct the asset’s value when you donate it. The charity can then sell the stock and keep the proceeds.

5. Making a qualified charitable distribution (QCD). If you are age 70½ or older, you can donate up to $100,000 each year ($200,000 for married couples filing jointly) directly from your IRA to a charity to satisfy all or part of your required minimum distribution (RMD).

Note: The donation must go directly to an operating charity; it cannot be deposited in a donor-advised fund. With the passage of the SECURE Act 2.0, taxpayers can also use up to $50,000 to fund a charitable gift annuity or charitable remainder trust.

The options you see here are just some of the ways you can help a charity in a tax-efficient way this fall. Consider working with a financial adviser who can likely share additional tips suited for your personal situation. With just a few months left in 2023, it makes sense to start planning now — for the benefit of your favorite charity(ies), and your tax bill. 

This is intended for educational purposes only and should not be construed as personalized investment advice. Past performance is no guarantee of future results. Please consult your investment professional regarding your unique situation.