Charitable giving could mean more than ever before

It’s a tough time to be a charitable organization – and even tougher to be someone who depends on them.

With inflation hitting us all, families are naturally focused on shoring up their own finances. Charitable giving is likely one of the first items to be cut from the budget.

According to Giving USA, charitable donations fell in 2022 for only the fourth time in 40 years. That’s at a time when demand for basic services like food and housing has increased – and the costs to provide them have spiraled up for charities.

But if you have the resources and want to help, it’s also a great opportunity. Charitable donations mean more now than in previous years. And strategic giving can help reduce your taxes and those your future heirs might otherwise pay, too.

We’ll introduce some of those strategies below. But first, a quick primer.

A charitable gift is a donation to a qualified 501(c)(3) nonprofit organization in exchange for which you (the giver) don’t receive anything in return. While most people think of donations as “cash,” you can also donate property, investments, real estate and more.

It can be! For 2023, you can deduct cash charitable contributions up to 60% and noncash contributions up to 30% of your Adjusted Gross Income.

But to deduct your donations, you have to itemize deductions. And for a lot of people, that’s not the best option anymore because the standard deductions are so high – $27,700 for a married couple filing jointly in 2023.

This means that a couple who maxes out the state and local tax deduction of $10,000 and has another $10,000 in mortgage interest to deduct would need to donate at least $7,700 before any of that amount became worth an additional deduction over the standard deduction.

Even if you don’t usually itemize deductions, all is not lost! Keep reading for strategies that can still make the most of your giving.

You can find nonprofits working on almost anything that’s meaningful to you, at the local, national or global level. For example, many charitable organizations work on providing or supporting:

• Food and housing
• Education and job training
• Mental and physical health
• Animal welfare
• Environmental causes
• Arts
• Disaster relief
• Spiritual guidance and support (for example, churches)

To see if donations to an organization will qualify for the tax deduction, you can use this IRS tool.

If you’ve been inundated with requests for year-end giving from dozens of organizations, you’re not alone. Charities know a lot of people make their donations as part of last-minute tax planning or holiday traditions. And many offer matching drives, which is a great way to give more with less.

It’s tempting to spread out your giving to as many organizations as possible. But for a lot of folks, choosing one or two organizations is a way to increase their impact and emotionally connect with a specific cause.

“Giving Tuesday” is on Nov. 28 this year; over $3 billion were donated on this single day in 2022. But remember that being strategic isn’t just about the causes you support. It’s also about the ways you support them.

The tax impact of required minimum distributions can blindside successful investors. If you plan to make charitable contributions, a qualified charitable distribution could be the answer.

With a QCD, you direct money from your RMD (up to $100,000) to a charitable organization instead of receiving it and donating after-tax dollars. QCDs can benefit you if you’re taking RMDs and you:

• Don’t plan to itemize deductions. A QCD isn’t included in your taxable income – no itemization needed. So with a QCD, you remove the money from your income, plus you can still take the standard deduction.
• Don’t need the RMD money. While you could, of course, take the RMD and then donate that money outside of a QCD, the income would still be counted in your pre-deduction adjusted gross income, and that can affect whether you’re subject to things like higher Medicare premiums or additional kinds of taxes.
• Want to make an annual charitable gift and have the flexibility to choose a different charity each time.

Special note: The SECURE 2.0 Act pushed back RMD dates, but not QCD dates – so as long as you’re at least age 70.5, you can take a QCD even if you haven’t started RMDs yet. If you fall into this category, note that:

• You can’t include the amount of the QCD as an itemized deduction, so it won’t lower your taxes for that tax year.
• However, it will remove money from your retirement accounts tax-free, which can help reduce the tax burden in future years once you start taking RMDs.

A donor-advised fund is an account that allows you to make a donation, invest the money, and then make grants from the account to your chosen charities over time.

With a DAF, you can make a large contribution and get the full deduction (up to IRS limits) when you file your taxes for that year. Your donation is initially invested by the DAF until you decide where to direct it, which could be years in the future. (Those disbursements of money from the DAF are called “grants,” and while you can choose to recommend grants to any public 501(c)(3) organization, the DAF has to approve them – you no longer own or control the assets.) 

A DAF can be a great option if you:

• Plan to make a donation as part of your tax strategy but need more time to decide where you want it to go. This often is the case if you have a year with a lot of income from large capital gains or a home sale, for example.
• Want to grow the amount – and therefore the impact – you’ll ultimately be able to offer your chosen causes. (Growth in a DAF is tax-free.)
• Support many causes and want to simplify your recordkeeping. With a DAF, you have one contribution to report but can choose a different charity to grant to each time.
• Have noncash assets you want to donate to a charitable organization that can’t accept them. DAFs can accept gifts of stocks, mutual fund shares, real estate and more.
• Don’t normally donate enough to make itemizing deductions worth it. If you have the ability, you could make one large donation to get the write-off, and then spread out your grants over several years.

“I’ve had clients who normally give $2,000 to charities every year instead make a $10,000 donation to a DAF,” says Director of Estate Planning Rodney Weaver. “Then, over the next several years, they’ll grant money out of the DAF to the charities that they would normally give to. By pulling their charitable donations forward into one year, they’re able to itemize all of their deductions – charitable donations, mortgage interest, property taxes, state and local income taxes – which together might be larger than the standard deduction.” 

Here are some things you’ll want to remember with a DAF:

• A DAF charges fees, so you’ll want to make sure it makes sense for you before you move ahead.
• You can’t combine these strategies and direct a QCD to a DAF.
• You deduct DAF contributions when you fund the DAF. You can’t deduct the grants later on, too.
• If you establish a DAF, you should name a beneficiary who can continue to honor your wishes for the money if needed.

Donations are irreversible, so make sure you’ve considered all the angles. Wondering if a QCD or DAF would be better for you? Edelman Financial Engines planners can help make sure you’re using the right strategies for your situation.