12 Tax-Smart Charitable Giving Tips for 2023
How to increase donor impact and reduce taxable income
Caleb Lund, CAP®
Director of Charitable Strategies Group
Hayden Adams, CFP®
Director of Tax Planning and Wealth Management
Schwab Center for Financial Research
February 22, 2023
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Persistent inflation and high interest rates in 2023 have driven up costs and negatively affected charities. As a result, taking an efficient, tax-smart approach to maximizing donor impact has never been more important.
Through difficult times, including the ongoing COVID-19 pandemic, the resilience of donor-advised funds has allowed donors to actually increase their giving power during an extended period of market volatility and economic uncertainty:
- Total giving in the U.S. during 2020, a year that included the start of the pandemic and global lockdowns, rose 5% compared to 2019, while giving from donor-advised funds rose 27%.
- In 2021, total giving by Americans rose 4% from 2020 to meet unprecedented needs related to the pandemic, while giving from donor-advised funds increased 28%.
- 2022 was the worst year for U.S. stock markets since 2008, as the outbreak of war, devastating hurricanes, and global humanitarian crises fueled recession fears. Yet donors with Schwab Charitable™ donor-advised fund accounts responded generously by granting a record $4.7 billion to charity, a 7% increase over 2021.
These donors were able to be even more generous largely because they had already contributed assets to their accounts, invested the assets for potential growth over time, and had the assets available for strategic grants to their favorite charities and for additional grants as needs arose.
Ongoing market volatility and economic uncertainty make it even more important for donors to embrace an efficient, tax-smart approach to charitable giving, in order to achieve maximum impact on the causes they support. Here are 12 ways to increase donor impact and potentially reduce taxable income in 2023 and beyond.
Charitable giving strategies and tax benefits
1. Donate appreciated non-cash assets instead of cash.
Donating appreciated publicly traded securities, real estate, and other non-cash assets held more than one year means donors generally can eliminate the capital gains tax they would otherwise incur if they sold the assets and donated the sale proceeds. Donors who itemize deductions when filing their tax returns may also claim a charitable deduction for the fair market value of the assets. Eliminating the capital gains tax can increase the amount available for charities by up to 20% and increase the deduction amount.*
2. Combine tax-loss harvesting with a cash gift.
Donors may identify publicly traded securities that have declined in price to below their cost basis (generally the purchase price) and sell those securities at a loss. In a process called tax-loss harvesting, capital losses can be used to offset capital gains and/or up to $3,000 of ordinary taxable income. Donors who itemize their deductions can then claim a charitable deduction for donating cash from the sale proceeds. If capital losses are greater than capital gains and after reducing $3,000 of ordinary income, the net remaining loss may be carried forward to offset capital gains or ordinary income in future years.
3. Give private business interests.
While publicly traded securities are the non-cash assets most commonly donated to Schwab Charitable, executives and entrepreneurs may own interests in a C-Corporation, Limited Partnership (LP), or Limited Liability Company (LLC) that could make good gifts. This is especially true if the interests have been held more than one year, appreciated significantly over time, and retained more value than other assets the donor is considering.
Giving a percentage of a privately held business interest can generally eliminate the long-term capital gains tax a donor would otherwise incur if they sold the assets first and donated the proceeds. Plus, the donor can claim a charitable deduction for the fair market value of the asset, as determined by a qualified appraiser, if they itemize.
4. Contribute restricted stock.
Executives may also own appreciated shares of restricted stock, which cannot be transferred or sold to the public—including by charities—until certain legal and/or regulatory conditions have been met. Once the company’s general counsel removes all restrictions, the stock may be donated to and sold by a charity. Donation of restricted stock allows a donor to generally eliminate the long-term capital gains tax on the appreciation and claim a charitable deduction, if they itemize.
5. Bunch multiple years of charitable contributions in tax year 2023.
Some donors may find that the total of their itemized deductions for 2023 will be slightly below their standard deduction amount (see "Tax deduction considerations" below). In that circumstance, it could be beneficial to combine or “bunch” 2023 and 2024 tax year contributions into one tax year (2023), itemize on their 2023 tax return, and take the standard deduction on 2024 taxes.
This bunching strategy, using both the standard deduction and itemized deductions, could produce a larger two-year deduction than two separate years of standard deductions. Bunching three or more years of contributions together may further increase a donor’s tax savings.
6. Combine charitable giving with investment portfolio rebalancing.
Rebalancing often involves selling appreciated investments that have exceeded target allocations and using sale proceeds to buy more of the assets that have become underrepresented in a portfolio. Donors can use a part-gift, part-sale strategy to potentially reduce the tax impact of rebalancing. They can accomplish this by claiming an itemized charitable deduction for donating long-term appreciated assets in an amount that offsets the capital gains tax on selling appreciated assets.
7. Offset the tax liability on converting a retirement account to a Roth IRA.
The primary benefits of a Roth IRA are potential tax-free growth, tax-free withdrawals (if holding period and age requirements are met), no annual required minimum distribution (RMD), and elimination of tax liability for beneficiaries (if account assets are passed to heirs). Donors with tax-deferred retirement accounts, such as traditional IRAs, may be able to use an itemized charitable deduction to help offset the tax liability on the amount converted to a Roth IRA.
8. Offset the tax liability on a retirement account withdrawal.
Donors with tax-deferred retirement accounts can also use charitable deductions, if they itemize, to help offset the tax liability on the amount they withdraw, including an RMD. This strategy may be used by individuals over age 59½ (to avoid an early withdrawal penalty). A withdrawal offers the additional tax benefits of potentially reducing a donor's taxable estate and reducing tax liability for account beneficiaries.
9. Leave a legacy by naming a charity as a beneficiary of IRA assets.
A unique feature of traditional IRAs is that heirs pay income taxes on the inherited assets at their own income tax rate at the time of withdrawal. This is why public charities can be ideal beneficiaries of IRA assets. Public charities do not pay tax on IRA income, which means every penny of the donation can be directed to support the donor’s charitable goals beyond their lifetime. What’s more, donors can ask their advisors about using IRA assets after their lifetimes to fund a charitable remainder trust, which will combine a gift to charity with income to heirs.
10. Establish a charitable trust.
A charitable remainder trust is an irrevocable giving vehicle funded with a gift of cash or non-cash assets. Income beneficiaries receive payments from the trust for a term of years or life and a public charity receives the remaining assets at the end of the term. The donor may claim a charitable deduction, if they itemize, in the year the trust is funded, and the deduction amount is typically based on the present value of the assets that will eventually go to the named charity.
A charitable lead trust is the reverse of a charitable remainder trust, in that a public charity first receives an income stream from the trust for a term of years. The irrevocable giving vehicle is funded with a gift of cash or non-cash assets. Benefits to the individual who funds the trust will vary depending on the trust structure. After the income stream period ends, the trust’s remaining assets are distributed to an individual or multiple people.
11. Use a donor-advised fund account as a component of any of the 10 strategies above.
A donor-advised fund is a public charity, and contributions of cash and non-cash assets are eligible for charitable deductions, if a donor itemizes. Contributed assets may be invested for potential tax-free growth, and donors can recommend grants from their accounts to other public charities of their choice at any time. Donor-advised fund accounts also can be a charitable beneficiary of IRA assets or be the named remainder beneficiary of a charitable trust.
12. Satisfy an IRA RMD through a non-taxable qualified charitable distribution (QCD).
Individuals age 70½ and older can direct QCDs of up to $100,000 per year from their traditional IRAs to operating charities (excluding donor-advised funds) and reduce their taxable income.** Starting in 2023, donors can also direct a one-time, $50,000 QCD to a charitable remainder trust or charitable gift annuity as part of recently passed SECURE Act 2.0 legislation.
A QCD can satisfy all or part of a donor’s annual RMD, is not taxable income for the donor, and does not qualify for a charitable deduction. Note that married couples who submit joint tax returns each qualify for an annual QCD of up to $100,000, for a potential total of $200,000, and the SECURE Act 2.0 mandates annual inflation-based adjustments of the QCD limit starting in 2024.
Tax deduction considerations for charitable giving
Donations are deductible for donors who itemize when filing their income tax returns. Overall deductions for donations to public charities, including donor-advised funds, are generally limited to 50% of adjusted gross income (AGI). The limit increases to 60% of AGI for cash gifts, while the limit on donating appreciated non-cash assets held more than one year is 30% of AGI. Contribution amounts in excess of these deduction limits may be carried over up to five subsequent tax years.
Donors who itemize rather than take the standard deduction typically do so because the total of their itemized deductions exceeds their standard deduction amount. Inflation-based adjustments pushed standard deduction amounts for 2023 to new highs: single filers may claim a $13,850 standard deduction, while married couples filing jointly can claim a $27,700 standard deduction.
What donors can do next
Schwab Charitable offers helpful articles, tools, and other resources to inform and guide donors throughout their philanthropic journey. One resource donors can consult to help build a thoughtful giving strategy is the award-winning Schwab Charitable Giving Guide, which features interactive modules on setting a giving budget, determining tax deductibility, and selecting giving vehicles.
Donors are also encouraged to discuss the giving strategies in this article with financial, tax, or legal advisors.
For questions or assistance with philanthropic planning or charitable giving, donors and their advisors may:
Contact us with questions or to request an information kit
Speak with a charitable specialist at 855-966-3764
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*The long-term capital gains tax is typically 15% or 20%, depending on the donor’s income level. The example does not take into account any state or local taxes or the Medicare net investment income surtax.
**Operating charities, or qualifying public charities, are defined by Internal Revenue Code section 170(b)(1)(A). Donor-advised funds, supporting organizations, and private foundations are not considered qualifying public charities.