In Charles Dickens’s timeless classic, A Christmas Carol, two gentlemen approach Ebenezer Scrooge in his office and say:
“At this festive season of the year, Mr. Scrooge, it is more than usually desirable that we should make some slight provision for the Poor and destitute, who suffer greatly at the present time.”
Indeed, many of us reflect on our blessings during the holiday season, setting aside some time or money for those less fortunate. At the risk of pouring cold water on the warm and fuzzy feelings we feel after helping someone in need, we must remember one thing. Taking a moment to plan and strategize our charitable giving can create significant savings come that other—Far more dreaded season—Tax season. For those unfamiliar with tax-efficient giving, we will introduce the concepts of itemized deductions, cash versus appreciated securities, and Donor-advised Funds. ‘Tis the season!
For filers to enjoy the tax benefits of charitable giving in 2022, they must itemize their deductions and not take the standard deduction. That means the sum of all itemized deductions, including charitable donations, must be more than $25,900 for married couples filing jointly and more than $12,950 for single filers. For those whose itemized deductions total something very close to the standard deduction, it may make sense to “bundle” 2022 and 2023’s donations in 2022. Imagine a single person who donates $1,000 per year to charity and whose other itemized deductions (excluding charitable donations) total $12,000. By not bundling, she would itemize $13,000 in deductions in 2022 and then take the standard deduction of $13,850 in 2023. By bundling her ’22 and ’23 donations in 2022, she would have $14,000 in deductions in 2022 and still take the standard deduction of $13,580 in 2023, thus maximizing the tax savings of her charitable donations.
Before cutting a check to your favorite charity, look to your brokerage account first for appreciated securities. Do you have stocks or mutual funds you’ve held for more than a year that have appreciated significantly? Donate the stock or mutual fund instead of cash! If you give a $10,000 check to a charity, you’ll get a $10,000 deduction. However, if you donate $10,000 worth of stock that you only paid $5,000 for, you’ll not only get the $10,000 deduction, but you’ll also avoid paying capital gains. In this case, that could be up to an additional $1,000 in tax savings (based on a top capital gains rate of 20% for $5000).
Sometimes, our charitable inclinations do not perfectly align with our optimal tax strategy. Fear not—A Donor Advised Fund can help bridge the timing gap. For example, you may want to donate $5,000 per year for the next five years to charity but do not yet know which charitable organizations most closely reflect your core values. You may also own highly appreciated company stock and wish to diversify your investment portfolio. Rather than sell your company stock and trigger a capital gains tax, donate $25,000 ($5,000 times five years) of that stock to a Donor Advised Fund. You will avoid the capital gains tax, reduce your investment exposure to the company, and receive a $25,000 upfront tax deduction. You then instruct the Donor Advised Fund to make $5,000 donations each year for the next five years to the charities of your choice.
We’ve only scratched the surface of tax-efficient giving, but hopefully, some of these examples have given you a glimpse of what’s possible. Talk to a financial advisor before employing any of the strategies discussed above, as nuance and specifics of the tax code (and the giving strategies) are beyond the scope of this article, and there may be better options for your unique situation. Tune in next month to see who can benefit the most from financial planning in 2023!