Charitable Giving & Tax Strategies

By Financial Advisor Carrie McDonnell | May 22, 2023

"I have found that among its other benefits, giving liberates the soul of the giver."
~ Maya Angelou

Why should you consider charitable giving?

As many of us know, giving can be beneficial to both the recipient and the giver. Not only are many charitable organizations dependent on the generosity of donors to operate their services, but the act of giving can be empowering for donors too. In fact studies suggest a multitude of emotional and physical benefits are tied to giving.¹ In this short article, we’ll explore another way in which charitable giving can benefit donors by way of reducing taxable income.

Who could benefit from charitable giving tax strategies?

As it would seem, a growing number of people could benefit. Americans have given more in the last three years than ever before. Perhaps due to the “unprecedented” events of recent—from the COVID-19 pandemic to natural disasters to racial injustices—charitable giving in 2020 soared to a record-breaking $471 billion, a 5.1% increase over 2019. Interestingly, instead of returning to pre-pandemic levels, philanthropic activity continued to soar in 2021, increasing by 4%. And in 2022—considering it was the worst year for U.S. stock markets since 2008—one would expect a slowing of generosity. Yet philanthropic giving remained heightened, suggesting that Americans respond with philanthropy during challenging times.²

Learning how to leverage tax strategies as an added benefit to charitable giving, or even as a primary goal, could be important to maintaining high levels of philanthropic giving in the years ahead.

What are some charitable giving strategies?

Below are a handful of strategies that you may find helpful when making your next donation.

1. When making a donation to your favorite charity, consider donating appreciated non-cash assets instead of cash. Donating appreciated securities or other non-cash assets held more than a year means donors can eliminate the capital gains tax they would otherwise incur if they sold the assets and donated cash. Not only that, when filing taxes, donors can claim a charitable deduction for the fair market value of the assets.

   This strategy can also come into play at rebalancing time in a taxable account. Instead of selling positions to rebalance original asset allocation, you can donate shares to reduce or eliminate the taxes you would owe.

2. Combine tax-loss harvesting with stock donations. Tax-loss harvesting comes into play when you have securities in your portfolio that have declined in value to below the purchase price. You can sell those securities at a loss and offset capital gains and/or up to $3,000 of ordinary taxable income. If you combine stock donations with tax-loss harvesting, you can offset and/or avoid paying capital gains tax while also increasing your tax deductions.

3. When converting a Traditional IRA to a Roth IRA, consider making a charitable donation to offset tax liability. When you convert a Traditional IRA to a Roth IRA, you must pay taxes on the amount withdrawn from a Traditional IRA and converted to a Roth, but a charitable donation can help ease the tax burden by reducing tax liability. See the benefits of Roth IRA’s here: www.schwab.com/ira/roth-ira

4. Offset the tax liability on a retirement account withdrawal. When you withdraw from a tax-deferred retirement account (which should be after age 59½ to avoid an early withdrawal penalty), you will need to pay taxes on this withdrawal. A charitable donation can help offset the resulting tax liability. This strategy could also be applied to Required Minimum Distributions (RMD’s), starting at age 73.

5. Use a Qualified Charitable Distribution (QCD) to fulfill a Required Minimum Distribution (RMD). Instead of having funds distributed to yourself and then paying taxes on that distribution, a QCD to a qualified charity can satisfy the RMD requirement and reduce the taxes you would normally incur on RMD’s. Individuals age 70½ and older can direct QCDs of up to $100,000 per year from their traditional IRAs to charities.

Talk to a financial advisor about which charitable giving strategies are right for you.

1. news.harvard.edu/gazette/story/2008/04/money-spent-on-others-can-buy-happiness/
2. advisorservices.schwab.com/insights-hub/perspectives/charitable_tax_strategies