Tax Efficient Giving Concepts

How can you accelerate your tax-advantaged philanthropy at the Community Foundation in 2023 and beyond? Experts (and the IRS) have several suggestions that we’re happy to share with you. Please consult your tax advisor or financial planner for guidance. 

1) Get tax benefits even if you aren't itemizing deductions

Give appreciated assets (stocks, real estate, etc.) and you’ll avoid paying any capital gains tax on the gain. Remember: Don’t sell then give. If you do, you’ll have to pay the capital gains tax. Instead, give it before the sale. The nonprofit doesn’t pay any tax when it sells. (If your favorite nonprofit doesn’t know how to accept or sell the asset, just give it to a donor-advised fund first and then pay the nonprofit from the fund.) If you’re age 70½ or older, you can give directly from your IRA or IRA rollover. This earned income is never taxed when it goes directly to the nonprofit.

2) Make a charitable swap: Give appreciated investments without changing your portfolio

Donating appreciated assets creates two tax benefits. The tax deduction is the same size as a gift of cash (the asset must have been owned for a year or more.) Plus, you avoid paying capital gains tax.

With a charitable swap, instead of giving cash, you give appreciated stock. Then, you use the cash to buy the same number of shares in the same company. Your portfolio doesn’t change, but the capital gain is removed because the shares are newly purchased.

3) Make IRA gifts at age 73+ (but you can start as early as 70½)

Those aged 73+ must take required minimum distributions (RMDs) from their retirement accounts like IRAs or IRA rollovers. These distributions count as taxable income, but giving directly from your IRA or IRA rollover to a nonprofit does not count as income and reduces your RMD. You can give up to $100,000 per year this way.

Even though RMDs do not start until 73, direct donations from your IRA or IRA rollover are allowed starting at age 70½. You can give up to $100,000 per year this way, regardless of RMDs. This earned income is never taxed because it goes directly to the nonprofit, making it a smart way to give back to the community.

4) Take advantage of higher interest rates

As interest rates continue to grow, you can lock these higher rates in for life with a charitable gift annuity (CGA); this gives you fixed annual payments for life and a charitable tax deduction while supporting the nonprofit. Higher interest rates make the charitable deductions even larger than before.

For an extra tax benefit, you can fund these by giving appreciated assets instead of cash. Or, if you are 70½+, you can fund these with money directly from your IRA or IRA rollover ($50,000 one-time maximum for IRA or IRA rollover - this also counts against any RMDs).

5) Move your 401(k)/403(b) into an IRA rollover to prepare for future IRA gifts

To make direct gifts with a 401(k) or 403(b), you must first convert the account into an IRA rollover. But conversion requires taking any RMD for that year from the 401(k) or 403(b) first. And, you must pay taxes on that year’s distribution.

You can avoid that tax by making the conversion before you turn 73. Then, you will be set up to make future donations from your IRA rollover whenever you want.

6) IRA beneficiary vs. gift in a will

Many people like to include a charitable gift in their will to support a cause that has been important in their lives. One tax smart strategy is to leave part of an IRA, 401(k) or 403(b) account to a nonprofit. This is a smart move because heirs pay incomes taxes on this money, but nonprofits do not. So, if you plan to leave anything to a nonprofit, use these accounts first.

7) Take an immediate deduction for donating inheritance rights to homes or farmland

Many people like to include a charitable gift in their will, but you can donate the inheritance right to farmland or a home using a special deed instead. Doing this creates an immediate income tax deduction. It is deductible because, unlike a will, you can’t change your mind once the deed is recorded.

8) Bunch gifts with a donor-advised fund

Because of higher standard deductions, fewer people are itemizing. This means fewer people can use charitable deductions. One way around that is to “bunch” charitable gifts.

Example: A donor puts 5 years’ worth of donations into a donor advised fund. The donor takes a tax deduction for the entire amount in that year. Because the deduction is so large, the donor itemizes in that year. In later years, the donor takes the standard deduction instead. The donor still sends the same money at the same time to his/her favorite nonprofits - it just comes from the donor’s fund instead of from his checking account.

9) Combine a Roth conversion with a donation

A Roth conversion moves money from a standard IRA into a Roth IRA. The benefit being that all distributions from the Roth IRA, even future earnings, are tax-free. Higher interest rates can mean higher earnings on investments, making this strategy even more attractive. The downside being that all money moved into the Roth IRA counts as immediate income.

When a Roth conversion creates an income spike, charitable planning can create a deduction spike to help offset it. This can include strategies like CGAs, donor-advised funds, charitable remainder trusts, retained life estate deeds, or paying a multi-year pledge early.

To learn more about how your gifts can make a lasting impact at The Community Foundation, contact: Nick Grimmer, CFRE, 315-525-6584, ngrimmer@foundationhoc.org. 

This article includes insight from Russell James, J.D., Ph.D., CFP, Professor of Charitable Financial Planning at Texas Tech University. It was edited for content and republished with permission.