Although your primary goal in charitable giving is to help make the world a better place, keep in mind that being strategic in your giving may lead to a win-win situation for you and your favorite causes.
One obvious benefit for taxpayers who are able to itemize is that they can deduct charitable contributions. However, the current standard deduction ($13,850 for single and $27,700 for married/joint filers for 2023) limits the number of taxpayers who can itemize.
If you typically can’t itemize, consider “bunching” your charitable donations by giving the amount you planned to contribute over multiple years in a single year, which could allow you to itemize. For example, if you planned to give $3,000 per year over the next five years, you would give $15,000 this year and none over the next four. If you’re a single filer, this would allow you to itemize this year and get a larger deduction.
It's important to be aware that beginning in the 2022 tax year, the adjusted gross income (AGI) limitation has been reinstated with limits of 60% AGI for cash donations and 30% for appreciated assets when giving to public charities. Consult your tax advisor for additional information.
Give more and avoid capital gains taxes
Giving can be as simple as donating cash at a charity’s website. But before you do that, think about different ways to donate that may have additional tax benefits. Consider this example involving a taxable account:1
Suppose you have $100,000 in a stock you paid $10,000 for several years ago (you must have held it longer than one year for this example). The IRS calls the $10,000 your “cost basis.” If you want to make a significant donation to a charity, you could:
- Sell the stock
- Pay long-term capital gains taxes of up to 20% plus the 3.8% net investment income tax on the $90,000 difference between the proceeds and your cost basis
- Donate what’s left to your favorite charity
On the other hand, you could simply give the stock directly to the charity. The charity is tax-exempt, so it could sell the stock without incurring capital gains tax and wind up having more than if you sold the stock yourself.
This table provides and illustration:
|Sell stock and donate proceeds
|Give stock directly to charity
|Proceeds from stock sale
|Capital gains tax @ 23.8% on $90,000 gain2
|Net received by charity
As you can see, not only would the charity receive a greater benefit if you simply donate the stock, but you also avoid a substantial tax amount.
When deciding to make a direct gift of stock or cash, be aware that your deduction may be limited by your income. The limitation is based on the type of organization and type of gift. If you’re looking to maximize your contributions, consult your tax advisor, who can help determine whether these limitations apply.
Enhance your investment income
Suppose you hold in a taxable account a substantial amount of stock that’s paying you little or no dividends and you’re looking to generate current income. You could sell the stock, pay any capital gains taxes, and use what’s left to purchase other investments or make charitable gifts.
However, if you’d like to avoid capital gains taxes, one strategy to consider is a charitable remainder unitrust, or CRUT.
After you establish a CRUT, you can donate the stock that you have owned for longer than one year to the trust, which may give you a tax deduction for a portion of your contribution. The trustee can sell the stock without incurring capital gains taxes and purchase other investments. The trust will make distributions to you. Keep in mind, your annual payout will be taxable to you under the four-tier accounting rules for charitable remainder trusts (CRTs).
The annual payout you receive from the CRUT is based on a percentage you selected in your trust agreement (not less than 5%) of the annual fair market value for the trust. Your tax and legal advisors will help you with this calculation. Remember the larger your selected payout percentage, the less of a tax deduction you may receive for making the donation.
At your passing or the completion of the trust's term, whichever comes first, the trustee will distribute what's left in the CRUT (the remainder) to the charity or charities you named in the trust document.
Although a CRUT offers a number of advantages, there are costs involved. For example, you'll need to enlist an attorney to draw up the trust document, and depending on the trustee you choose, you may have to pay for the trustee's services.
So before you employ this strategy, review your charitable giving goals. If receiving an income payout is not primary among them, work with your tax advisor to calculate the income tax deduction you may receive from an outright charitable gift versus establishing a CRUT to determine which strategy may be better for your situation.
Look into a donor advised fund (DAF)
A DAF is a charitable giving vehicle sponsored by a public charity. It allows donors to give to IRS-qualified public charities over time but receive a tax benefit in the year in which the contribution to the DAF is made. A DAF can work well with the “bunching” technique described above.
With a DAF, contributions, which are irrevocable and cannot be taken back, are placed into a fund account where they can be invested and potentially grow tax free. The donor, or a person or entity the donor appoints, may recommend grants from the account to any qualified public charity-even years into the future.
Consider a qualified charitable distribution
If you’re 70½ or older and have an IRA, think about a qualified charitable distribution (QCD), which:
- Lets you gift up to $100,000 per year from your IRA to qualifying charities
- Is a tax-free distribution (may fail the tax-free treatment if benefits [tickets, etc.] are received)
- You can take advantage of even if you don’t itemize3
- Requires you to make the payment directly from the IRA to a qualified charity
- Counts toward satisfying a required minimum distribution (RMD) without increasing taxable income
Recently, the SECURE Act 2.0 made several changes to the qualified distribution rules beginning in 2023. First, the Secure Act now provides that the $100,000 limit will be indexed to inflation. Second, Section 307 of the Secure Act 2.0 provides donors the opportunity to make a one-time, $50,000 distribution (QCD) to split interest gift arrangements such as a charitable gift annuity (CGA) or a charitable remainder trust (CRT). This $50,000 limit will be adjusted for inflation starting with taxable years beginning after 2023.
You should be aware that for QCDs other than the above outlined provisions, DAFs, CRTs, charitable lead trusts, and other supporting organizations and private non-operating foundations, etc. are not considered qualifying charities under the QCD rules.
- Contact a financial advisor for more information about incorporating tax planning into your charitable giving.
- Work with your tax advisor to determine the strategy or strategies that may be right for you.
1 This example is for illustrative purposes only.
2 Capital gains may also be subject to tax at the state level. Check with your tax advisor.
3 With a QCD, you can still take the standard deduction if you don’t itemize. However, if you do itemize, no deduction is allowed since the distribution is not taxable.
This article is designed to provide accurate and authoritative information regarding the subject matter covered.
Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.
Wells Fargo Advisors’ view is that investment decisions should be based on investment merit, not solely on tax considerations. However, the effects of taxes are a critical factor in achieving a desired after–tax return on your investment.
The information provided is based on internal and external sources that are considered reliable; however, the accuracy of the information is not guaranteed. Specific questions on taxes as they relate to your situation should be directed to your tax advisor.
This material has been prepared or is distributed solely for informational purposes. Information has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed.
Trust services available through banking and trust affiliates in addition to non-affiliated companies of Wells Fargo Advisors.