Smart Giving: End-of-Year Charitable Donation Strategies
As 2022 comes to a close, many people focus on charitable giving for the year-end tax benefits. Supporting the important work that nonprofits do is very rewarding, and fortunately there are ways to help the organizations you care about while also making smart decisions for your finances. It’s a true win-win.
Most people are aware that you can reduce your current year taxable income through a charitable deduction (if you itemize your deductions); you must donate to a qualified charity by Dec. 31 and keep the required documentation, which will vary depending on the contribution type and amount. But before you reach for your checkbook, don’t miss these tips from HBC’s Charitable Giving Group to ensure your donation makes the biggest difference.
Leverage by Gifting Appreciated Securities!
Donating appreciated stocks, bonds or mutual funds (that you’ve held for more than one year) has become increasingly popular. Publicly traded securities (including ETFs and mutual funds) may be donated to many public charities, and there are two great upsides. The first is it provides a tax deduction equivalent to the fair market value (assuming the assets go to a public charity and do not exceed 30 percent of your Adjusted Gross Income or AGI). In addition, you’ll pay no tax on your gains. Although the market has been quite volatile in 2022, you can still likely find some appreciated assets in your portfolio.
Think about a Qualified Charitable Distribution (QCD)
If you are at least 70½, you can direct up to $100,000 a year from a traditional IRA to a charity through qualified charitable distributions (QCD). This is a great solution for retirees who may not have enough expenses, like home mortgage interest or out-of-pocket medical expenses, to justify itemizing their deductions. QCDs don’t require that you itemize, meaning that you may use the higher standard deduction, but still use a QCD to offset the income generated by an IRA distribution.
Consider a Bunching Strategy
To make the most of the potential itemized tax deductions, consider "bunching." This means bundling or bunching deductions in a single year, and then skipping one or even several years of donations. This strategy works well when your total itemized deductions for a single year may fall below the standard deduction. Obviously, this strategy requires having the financial capacity to pack more than a year's worth of your contributions into a single year. But the upside is, your “bunched” contribution can have a lot of impact for your charity AND for donors experiencing a high-income year or preparing for retirement, since you can maximize your tax benefits when you need. If you pair this strategy with a Donor-Advised Fund or DAF discussed next, you can create a ready reserve to support charities over time.
Optimize Giving with a Donor-Advised Fund (DAF)
A DAF is a giving vehicle sponsored by a public charity. It allows donors to make a charitable contribution by December 31 and be eligible to receive an immediate tax deduction for 2022. DAFs are unique because you can receive an income tax deduction, while being able to fund grants at a later time, giving you the breathing room to consider how and when to divide up the actual donation. This approach can help streamline your giving, including tax recordkeeping, in one convenient location. It also is a great vehicle in conjunction with the bunching strategy, as it allows a larger charitable deduction in a single year, without having to make the actual gifts to your favorite charitable organizations all at once.
Colorado Child Care Contribution Credit (5C)
The Colorado Child Care Contribution Credit, commonly referred to as the 5C tax credit, was established to encourage greater private support of Colorado child care programs. Cash contributions to certain qualified Colorado organizations (and/or programs within certain nonprofits) will entitle the donor a 50% nonrefundable credit against their state income tax liability for that year, up to a maximum $100,000 credit (or the donor’s Colorado income tax liability for that year, if less). Any unused credit due to income tax liability limitations may be carried forward for up to 5 additional tax years. The qualified organization must provide you with a statement to this effect that you must submit with your timely filed tax return. Most organizations require you to indicate that your donation should be allocated to these purposes/programs in advance. Grants from DAFs (discussed above) do not qualify for the 5C Credit. This is a unique way to support certain qualified programs/charities with a much reduced out-of-pocket impact to you.
Before moving forward with any of these giving strategies, consult your legal, tax or financial advisors. One last tip – don’t delay. Brokerage firms get very busy these final weeks of the year.
Happy giving!
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. This information shall not be construed as legal advice.