Who Are the Happiest?
“Those who are the happiest are those who do the most for others.”
– Booker T. Washington, prominent African American educator, author, and leader, who founded Tuskegee Normal and Industrial Institute (now Tuskegee University)
Individual donors have become the backbone of charitable giving, collectively contributing more than half of all donations in the United States. According to GivingUSA, in 2020, Americans gave $471.44 billion to charity, a 5.1% increase over 2019. Individual donors made up 69% or $324.10 billion of the contributions.
If you are considering making a charitable donation in 2022, take a moment to review these 5 strategies that can help you maximize your charitable impact, while minimizing your taxes before year-end.
Strategy 1: Donate Appreciated Stock – NOT Cash!
When you donate appreciated stock that you’ve held longer than one year, you avoid the capital gains tax you would have otherwise incurred if you had sold the stock first and then donated the proceeds. The long-term capital gains tax is typically 15% or 20%, depending on your income level. Eliminating this tax can increase the amount available for charities by up to 20%. It is best to donate the shares with the highest unrealized capital gains. You may also consider repurchasing the stock at the current price – this resets your tax cost basis and reduces future capital gains tax. Keep in mind that your tax deduction is typically limited to 30% of your adjusted gross income (AGI) and unused charitable deductions can be carried forward for 5 years.
Strategy 2: Combine Two Years of Contributions into 2022
The standard deduction for 2022 is $12,950 for single filers or $25,900 for married couples filing jointly. To benefit from an itemized tax deduction, like a charitable gift, your total itemized deductions must exceed the standard deduction amount. Many taxpayers find themselves on the margin between taking the standard deduction or itemizing. Therefore, it could be beneficial to combine or “bunch” your 2022 and 2023 charitable contributions into this year, which means you would itemize deductions on your 2022 tax return and take the standard deduction on your 2023 tax return.
Strategy 3: Open a Donor Advised Fund (DAF)
Donor advised funds are popular charitable giving vehicles, known for their ease and flexibility. Through a donor advised fund, individuals can make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund over time. You can choose how your fund is invested, and the fund’s investment growth is completely tax-free. Utilizing a DAF is especially helpful when you are unsure about which charities you want to support and need time to develop a strategic giving plan. This can also be a useful tool when you have a one-time income event, such as the sale of a business, and you want to maximize your charitable tax deduction in that year.
Strategy 4: Utilize a Qualified Charitable Distribution (QCD)
Anyone age 70 ½ and older can direct up to $100,000 per year from their Individual Retirement Account (IRA) to a qualified charity through Qualified Charitable Distributions (QCDs). The QCD can be used to satisfy all or part of your required minimum distribution (RMD) for 2022. A QCD excludes the amount donated from taxable income and is effectively an “above the line” tax deduction which means you get the deduction even if you don’t itemize. Note that two individual taxpayers who submit tax returns with married filing jointly status each qualify for an annual QCD of up to $100,000.
Strategy 5: Use a Charitable Deduction to Offset Taxes from a Roth IRA Conversion
Roth IRA conversions are a popular tax planning tool used by many of our clients. However, the amount withdrawn and converted to a Roth IRA is treated as taxable ordinary income. You may want to consider using charitable deductions to offset this tax liability. The primary benefits of a Roth IRA are tax-free growth, tax-free withdrawals (if holding period and age requirements are met), no annual RMDs, and tax-free distributions for heirs.