Tax-Smart Philanthropy for 2022
2021 was a record-breaking year for giving through Schwab Charitable donor-advised fund accounts. Donors showed exceptional generosity by granting $4.4 billion to 114,000 charities.
For some of these generous individuals and families, 2021 was also a year that resulted in a larger tax bill than expected, and they are now exploring ways to reduce their tax exposure and maximize their charitable impact in 2022.
2022 tax environment
It is unlikely that any U.S. tax law changes will materially impact the current rules around charitable giving for the 2022 tax year. Considering the time required to pass and implement tax law changes, any legislation that may be passed in 2022 likely would not be implemented until 2023.
A key factor for determining the tax benefits of a charitable gift is the annual standard deduction amount, which has more than doubled since passage of the Tax Cuts and Jobs Act in December of 2017. For 2022 taxes, single filers may claim a $12,950 standard deduction, while married couples filing jointly can claim a $25,900 standard deduction. This is an increase of $400 for single filers and $800 for married couples, compared to 2021 amounts.
Because of these increases in the standard deduction amount, some taxpayers who historically itemized deductions—including charitable contributions—may find that the total amount of their itemized deductions does not exceed the standard deduction.
However, charitably inclined individuals and families can still maximize their tax benefits through strategies utilizing both itemized and standard deductions, as explained below in the bunching contributions strategy, as well as through key charitable giving incentives in existing tax laws. Annual income tax deduction limits for gifts to public charities, including donor-advised funds, are 30% of adjusted gross income (AGI) for contributions of non-cash assets, if held more than one year, and 60% of AGI for contributions of cash. Contribution amounts in excess of these deduction limits may be carried over up to five subsequent tax years.
With this basic framework in mind, let’s review eight tax-smart tips for charitable giving in 2022.
Tax-smart giving strategies
1. Contribute appreciated non-cash assets instead of cash.
One of the most effective tax-smart strategies for achieving maximum charitable impact is donating appreciated non-cash assets held more than one year. Donors who use this strategy can generally eliminate the capital gains tax they would otherwise incur if they sold the assets first and then donated the proceeds.
Eliminating the capital gains tax—15% or 20%, depending on the donor’s income level—can increase the amount available for charities by up to 20%. It can also increase a donor’s tax savings, as shown in the example below.
This hypothetical example is only for illustrative purposes. The example does not take into account any state or local taxes or the Medicare net investment income surtax. The tax savings shown is the tax deduction, multiplied by the donor's income tax rate (24% in this example), minus the long-term capital gains taxes paid.
2. Use a part gift, part sale strategy to offset capital gains tax from investment portfolio rebalancing.
Over time, some assets that have gained in value will account for more of a portfolio, while those that have declined will account for less. This can leave an investor exposed to unintended risk if the market environment should suddenly change.
Rebalancing involves selling positions that have exceeded the target allocation and allocating the sale proceeds to portfolio investments that have become underrepresented. Each time an appreciated position is sold in a taxable (e.g., non-retirement) account, a taxable event occurs.
Tied to strategy 1 above, donors who itemize deductions can utilize a part gift, part sale strategy to reduce the tax impact of rebalancing. This is accomplished by claiming an income tax deduction for donating some appreciated assets to charity, in an amount that offsets gains from selling other appreciated positions, within the same tax year.
3. Bunch two years of contributions into 2022.
Some donors may find that the total of their itemized deductions for 2022 will be slightly below the level of the standard deduction. In that circumstance, it could be beneficial to combine or “bunch” 2022 and 2023 charitable contributions into one year (2022), itemize deductions on their 2022 tax returns, and take the standard deduction on 2023 taxes.
In addition to achieving a large charitable impact in 2022, this strategy could produce a larger two-year deduction than two separate years of itemized deductions, depending on income level, tax filing status, and giving amounts each year.
4. Make a Qualified Charitable Distribution (QCD) of Individual Retirement Account (IRA) assets.
Whether itemizing deductions or taking the standard deduction, individuals age 70½ and older can direct up to $100,000 per year tax-free from their IRAs to operating charities through QCDs.* By reducing the IRA balance, a QCD may also reduce the donor's taxable income in future years, lower the donor's taxable estate, and limit IRA beneficiaries' tax liability.
5. Use a charitable deduction to help offset the tax liability on a retirement account withdrawal.
This strategy may be used by individuals over age 59½ (to avoid an early withdrawal penalty) who will itemize deductions for 2022. As with the above strategy, a withdrawal offers the additional benefits of potentially reducing a donor's taxable estate and limiting tax liability for account beneficiaries.
6. Use a charitable deduction to help offset the tax liability from converting a retirement account to a Roth IRA.
Donors who itemize deductions and have tax-deferred retirement accounts, such as traditional IRAs, can use charitable deductions to help offset the tax liability on the amount converted to a Roth IRA. The primary benefits of a Roth IRA are tax-free growth, potentially tax-free withdrawals (if holding period and age requirements are met), no annual required minimum distribution, and elimination of tax liability for beneficiaries (depending on the timing).
7. Establish and contribute to a charitable remainder trust or charitable lead trust.
A charitable remainder trust combines a guaranteed income stream to an individual or individuals with a donation to charity. In this structure, once a donor makes a charitable contribution, the trust makes annual payments to the donor or other people for life or a term of up to 20 years. At the trust’s termination, a charitable beneficiary receives the remaining assets.
A charitable lead trust is the reverse of a charitable remainder trust—that is, charities are paid first. This trust makes at least annual payments to a designated charity or group of charities for a set period of time. After that period, the trust ends and the balance passes to designated non-charitable beneficiaries, such as the donor or the donor’s family.
Note that with either trust, donors with donor-advised fund accounts could name a donor-advised fund as the charitable beneficiary. Naming a donor-advised fund account as trust beneficiary provides additional flexibility and time to determine which charity or charities will receive the charitable assets and when the assets will be distributed through grant recommendations.
Setting up and funding a charitable trust is complicated. Donors should consult tax and legal advisors.
8. Open a donor-advised fund account now, while taxes are top of mind, and make tax-deductible contributions at any time before the end of the year.
A Schwab Charitable account makes charitable giving tax-smart, simple and efficient. Once an account is open, a donor has the flexibility to either make one lump-sum contribution or a series of contributions. Any contribution—of cash or non-cash assets—received by December 31 is eligible for a 2022 tax deduction.
What donors can do next
Schwab Charitable has tools, information, and other resources available online to inform and guide donors as they plan their giving for 2022. Creating a strategic giving plan may be a good place to start.
The Schwab Charitable Giving Guide is a powerful tool designed to help donors plan and manage their giving, no matter where they are in their philanthropic journey. Donors may delve into any of 13 philanthropic topics and answer guiding questions that will help inform their plan.
For additional resources related to the strategies in this article, donors may review the following information:
- Donating non-cash assets
- Bunching charitable contributions
- Making Qualified Charitable Distributions (QCDs)
- Exploring donor-advised funds
Donors contemplating any of the strategies in this article should consult with their financial, tax and legal advisors.
For questions or assistance with philanthropic planning or charitable giving, donors and their advisors may: