How to Use Tax Strategy Advice to Increase Your Charitable Gifts

The April 15^th IRS tax deadline serves to remind us that smart tax-planning is a year-round affair. (This includes the use of charitable donations to lower individual and corporate tax burdens.) Regardless of the season, promoting tax benefits of charitable donations should be part of any philanthropic campaign strategy.

When soliciting prospects, ways to maximize tax deductions should be included, along with discussions of your organization’s mission, how your work improves the community at large, and why your activities complement a donor’s own values and priorities. In fact, investment giant Charles Schwab, no novice when it comes to tax minimization, has compiled a list of “12 Tax-Smart Charitable Giving Tips for 2023.” Their advice includes strategies and tactics even seasoned investors may not have considered.

Here is a sampling:

1. Donate appreciated non-cash assets instead of cash. If one donates publicly traded securities, real estate, or other non-cash assets that have been held for more than a year, then the charity receiving this donation can get the benefit of any appreciation the asset(s) has enjoyed without having to pay capital gains tax. This can increase the amount available to the charity by up to 20 percent and raise the deduction amount, according to Schwab.
2. Combine tax-loss harvesting with a cash gift. On the flip side, if the value of non-cash assets has dropped below their purchase price—as many stocks have this past year—the holder can sell those securities at a loss, then use those losses to offset capital gains on other assets and/or up to $3,000 of ordinary income. (This is called tax loss harvesting.) The donor can then claim a charitable deduction for having donated the cash from the sale. In other words, there’s a double benefit.
3. Give private business interests. If one owns shares in a privately held business such as a C-Corporation, Limited Partnership (LP), or Limited Liability Company (LLC) and those shares have significantly increased in value over time, some of those shares can be donated to charity. Doing so can usually avoid long-term capital gains taxes, plus the donor can claim a charitable deduction for the asset’s fair market value.
4. Contribute restricted stock. A “restricted stock” is one that can’t be transferred or sold to the public (including charities) until certain legal and/or regulatory conditions have been met. (This is usually stock issued to a company founder and/or CEO). Once conditions are met— and that’s usually the call of the company’s general counsel—then the stock may be donated to the charity, once again avoiding capital gains taxes while at the same time permitting appropriate charitable deduction when itemizing.
5. Bunch multiple years of charitable contributions in tax year 2023. If a donor’s itemized deductions for 2023 are below the standard deduction amount, it may be beneficial to “bunch” 2023 and future 2024 tax year contributions into one tax year (2023), then simply take the standard deduction in 2024. This could produce a larger, two-year deduction than employing two separate years of standard deductions. (It’s actually possible to “bunch” multiple years of contributions for even larger tax savings, again according to Schwab.)
6. Combine charitable giving with investment portfolio rebalancing. “Rebalancing” means diversifying a portfolio by selling off high-performing assets to buy others so there’s a greater mix—and thus less exposure to market fluctuations. Using a part-gift, part-sale strategy can also help donors reduce the tax impact of such rebalancing.
7. Offset the tax liability on converting a retirement account to a Roth IRA. Donors possessing traditional Individual Retirement Accounts (IRS) may wish to convert them to Roth IRAs. These offer significant tax benefits. But such a conversion usually comes with tax liabilities—which a donor can offset with an itemized charitable deduction.
8. Offset the tax liability on a retirement account withdrawal. Speaking of retirement, a withdrawal from a standard, non-Roth tax deferred account usually incurs some tax liability. If one is over 59-1/2 years-old, an itemized charitable gift can offset this liability, Schwab advises.
9. Leave a legacy by naming a charity as a beneficiary of IRA assets. If a donor dies, their heirs pay income taxes on monies they withdraw from any IRA they have inherited. Not so with public charities. If a charity inherits the IRA, then all withdrawals are tax free. (Which means more money for the charity the donor supports!)
10. Establish a charitable trust. The two main types of charitable trusts are remainder trusts, in which a designated charity receives all remaining assets after a specified length of time, or a lead trust, in which the charity receives an income stream for a set number of years, after which the remainder goes to other designated beneficiaries. (What works best for the donor will remain their personal preference.)
11. Use a donor-advised fund account as a component of any strategy described above. Schwab describes a donor-advised fund as “a public charity, and contributions of cash or non-cash assets are eligible for charitable deductions, if a donor itemizes.” In other words, it’s a charity that gives to other charities.
12. Satisfy an IRA RMD through a non-taxable qualified charitable distribution (QCD). If a donor is older than 70-1/2, they can donate up to $100,000 a year from their traditional IRAs to charity (excluding donor-advised funds—see above) and thus reduce their taxable income. Starting this year, donors can also make a one-time $50,000 donation to a charitable remainder trust or charitable gift annuity.

          Of course, it goes out without saying that when discussing tax implications of any donation with potential donors, it’s best to direct one to their CPA for specific advice. Nonetheless, the tax benefits of charitable giving should be part of any discussions you have when seeking contributions for your charitable or non-profit organization. For more information on this topic, please contact our team of DonorSearch experts.