Tax Planning and Charitable Giving: What to Consider for Year-End and Beyond

Tax Planning

It’s been a roller-coaster year of unsettled markets, rising interest rates, and household finances rocked by the highest inflation in more than four decades (which is one reason why tax planning is more important now than ever before for your donors).

Despite these uncertain economic times, donors are still stepping up to the plate and hitting home runs for the nonprofits they support. In the first six months of 2022 alone, medium-sized nonprofits saw giving increase by 11.6 percent, according to The Blackbaud Institute.

And now that we’re in the last two months of the year, it’s time to really focus: Year-end gifts usually make up the bulk of most nonprofits’ yearly cash donations (about 31% in December; 12% in the last three days of the year). Which is why it literally pays to keep your donors up-to-date on tax-law changes.

For 2022, donors should be aware that the temporary increase in the deduction limitation for cash gifts to 60 percent of adjusted gross income remains in effect. Non-cash gifts to qualified charities and donor advised funds earn a deduction of up to 30 percent of adjusted gross income. Gifts in excess of these limits may be carried over for up to five tax years.

Also, the standard deduction increased by $800 (to $25,900) for married couples, and by $400 (to $12,950 ) for single taxpayers. That means some taxpayers who have itemized charitable contributions in the past may find the total amount of their itemized deductions doesn’t exceed their standard deduction.

While your donors should always consult with a qualified tax advisor, here’s a general look at things they should consider as part of their tax planning in order to maximize their charitable giving and their tax advantages—both for year-end, and looking forward to 2023.

Skip the Cash — Give Appreciated Assets Instead

Gifting appreciated non-cash assets, such as real estate, stocks, cryptocurrency, or even private business interests generally allows donors to eliminate any capital gains tax they would have incurred if they sold the assets first and then donated the proceeds. By giving appreciated assets directly, donors will also realize a deduction for the fair market value of those assets. This is often a good tax planning strategy for those who itemize.

Create or Contribute to a DAF

A donor-advised fund offers a number of tax planning benefits. Donors are eligible for an immediate tax deduction the year they open or donate to the fund. A DAF also eliminates capital gains tax on appreciated assets donated to the fund.

Use a "Part Gift, Part Sale" Strategy

Instead of selling assets like stock or real estate outright, consider gifting a percentage to your favorite nonprofit first. For instance, you could gift 25 percent of a property to a charity before putting the property on the market. You’ll get an income tax deduction for the donated portion, plus reduce the capital gains tax bill by 25 percent when the property sells.

Use a Bargain Sale Strategy

A donor can sell property to a nonprofit for a price that’s below the fair market value. In return, the donor receives an immediate income tax deduction for the discount, and avoids capital gains tax on the donated portion of the property.

Bunch Those Contributions for Optimal Tax Planning

If a donor’s total itemized deductions for 2022 are slightly below the level of the standard deduction, they could combine or (bunch) 2022 and 2023 charitable contributions into a single year (’22) and itemize deductions on their 2022 tax returns. Then, in 2023, they could take the standard deduction.

Don't Forget the QCD

Donors who are 70½ or older can gift up to $100,000 tax-free to charity from their IRAs each year through a Qualified Charitable Distribution.

With some careful tax planning, you and your donors can maximize their giving power in time for year end, and prepare for an even stronger year ahead.

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