Year End Giving Opportunities
As we progress into the final quarter of the year, it tends to beg the question, “What are the tax advantaged year-end giving opportunities?”
As Christians, we want to make sure we’re maintaining a generous heart but also taking advantage of what the tax code has to offer.
By giving in a tax-efficient manner, we’re actually able to give more to the organizations and causes that we’re called to support.
Generosity Should Remain the Goal
It’s easy to get caught up in “optimizing our finances and giving” and completely lose sight of why we’re giving in the first place. Generosity should remain the goal when exploring year-end giving opportunities, or even giving opportunities in general.
Real quick, I’d like to highlight the difference between giving and generosity. Anyone can give with masked emotions, motives, or out of felt obligation. However, to be generous is to give out of a grateful and joyous heart. As Christians, this is sourced from the sacrificial gift of Christ.
If you haven’t done so already, be sure to read the blog post that fellow advisor Christopher Wells wrote about the shortcut to generosity.
Remember, God doesn’t need our money (or rather His money back). But rather we find ourselves in a situation where we get to worship Him through our generosity.
“Each one must give as he has decided in his heart, not reluctantly or under compulsion, for God loves a cheerful giver.”
2 Corinthians 9:7
If we lead our giving with a generous and thankful heart then we can ensure we’re giving cheerfully and wholeheartedly. However, when we lead our giving with how much we can save in taxes or some other financial benefit to be had then we’ve gotten it backwards.
What You Can Give
Although there are many things we can give, I’ll be focusing on the financial items that provide a direct tax benefit. Also, keep in mind that most of the tax deductions for giving can only be claimed by those itemizing their deductions.
Finally, in order to receive a tax deduction for donations, the recipient must be a qualified 501(c)(3) organization. If you’re unsure about a potential organization’s status as a 501(c)(3) then you can use the IRS’ tax exempt organization search tool.
Be sure to consult with your financial, tax, and legal advisors before making any decisions.
Cash
Perhaps the easiest asset to donate is cash. According to Kingdom Advisors, “approximately 10% of all U.S. wealth is held in cash, yet 80% of all charitable giving is done with cash.”
Cash is great to donate if you already have it set aside or you haven’t accumulated many assets (e.g. you’re in your 20s, 30s, or 40s). However, selling assets for cash to donate MAY NOT be the best route for donating (more on this later).
For 2023, you can donate cash up to 60% of your adjusted gross income (AGI–line 11 on Form 1040) and receive a dollar-for-dollar deduction that reduces your taxable income.
So, for example, if your AGI is $200,000 then you could donate up to $120,000 in cash and receive a tax deduction that reduces your taxable income dollar-for-dollar for doing so.
Investments/Securities
Investments, especially highly appreciated ones, are a perfect asset to give if your situation permits. According to Kingdom Advisors, “approximately 90% of all U.S. wealth is held in non-cash assets, but only 20% of charitable giving is asset-based giving.”
By donating appreciated investments, held in a taxable account, you get to avoid recognizing, and paying, capital gains tax. Capital gains tax is simply the tax imposed on the difference between what you sold an investment for and what you paid for it.
Donating investments is best suited for those that have accumulated a sizable amount of assets for their situation and have accumulated unrealized capital gains on those investments.
If you’ve held an investment for less than one year and then sell it you will pay short-term capital gains tax which is equivalent to your income tax rate. The long-term capital gains rates vary based on taxable income (line 15 on Form 1040) but are either 0%, 15%, or 20%.
For 2023, appreciated non-cash assets, such as stocks, can be donated and deducted at the fair market value of the investment up to 30% of your AGI.
So, for example, if your AGI is $200,000 then you can donate and deduct up to $60,000 worth of investments.
Private Business Interests
I won’t hit on it much, but one of the lesser known assets to give is private business interests. If you own a private business then this could be a great opportunity for charitable giving coupled with a business exit strategy.
Giving private business interests is less of a focus on the year-end giving aspect and more of the impact over multiple years. This is why it’s important to work closely with an attorney, CPA, and financial planner that are well-versed in this type of transaction.
Potential Opportunities
When considering charitable gifts, there are several opportunities to carry out that giving that you should consider.
Donor Advised Funds (DAFs)
According to Investopedia, a donor-advised fund is a private fund administered by a third party and created for the purpose of managing charitable donations on behalf of an organization, a family, or an individual. Donor-advised funds allow you to contribute assets, get a tax deduction in the year of giving, and recommend where you want your donation to go in the future.
There are various types of donor-advised fund sponsors, ranging from community foundations to public foundations to more recognizable national donor-advised fund organizations (e.g. National Christian Foundation, Vanguard, Schwab, Fidelity, etc.).
When it comes time to donate you’ll “recommend a grant” to your desired organization. However, the third-party administering the donor-advised fund doesn’t have to, or may not be able to, approve the requested grant. This is important to remember.
When donating to a DAF, the same tax deduction benefits apply as what was previously mentioned above.
Another great benefit of a DAF is that you can have your donations, cash and investments, invested within your account. This allows for the money to continue to grow, in a tax-free manner, while you determine who to give to.
It’s important to know that if you do want to donate proceeds from highly appreciated securities (e.g. stocks) to a DAF you have to wait until the investments are in the DAF before selling if you want to avoid paying capital gains tax.
For example, let’s say you want to donate 1,000 shares of XYZ that you initially bought for $10. At the moment the shares are trading for $100 per share. This means you have approximately $90,000 in unrealized capital gains. If YOU sold the shares and simply donated the cash then you’d be on the hook for paying capital gains tax on that $90,000 and thus would only be able to give $90,000 less the capital gains tax.
However, if you donated the shares to the DAF before selling, then no capital gains tax would be owed whenever the shares were sold and you’d be able to give more to the organizations and causes you’ve been called to support.
Directly to Nonprofits / Tax-Exempt Organizations (501(c)(3)s)
Often the easiest way to give to a 501(c)(3) organization is directly to the organization. Most organizations have the systems in place to accept cash donations. Some may even have instructions and systems in place to receive asset/investment donations.
This could be a great option if you’re only in the position to donate cash and you’d like the organization to be able to benefit from your donations immediately.
Individuals
Many of us have likely come across friends and family in our lives that are pursuing ministry or philanthropic opportunities. Unless they have a 501(c)(3) set up you likely won’t receive any tax benefit from donating to them. But that’s okay! Sometimes we’re called to give to people regardless of the benefit we may or may not receive.
I’ll also note that the annual gift tax exclusion for 2023 is $17,000. This means that each individual can give up to $17,000 to any number of individuals in 2023 and the gift will not have to be reported on a gift tax return OR count against your federal estate and gift tax exclusion. This option is great for cash gifts directly to individuals. I see this used a lot when parents want to give to their adult children.
Qualified Charitable Distributions (QCDs)
If you’re over the age of 70.5 then you have a unique opportunity to give from any Traditional IRAs that you may have.
Insert the qualified charitable distribution (QCD).
A QCD is when you donate money directly from your Traditional IRA to the 501(c)(3) of your choosing. By doing this, the QCD does not get reported as taxable income for tax purposes.
Do note that you cannot make a QCD to a donor-advised fund.
Making QCDs can be a great strategy for those that don’t necessarily need the money from their Traditional IRA to live off of but are required to withdraw the money due to Required Minimum Distribution (RMD) rules.
Again, this is a great opportunity to be generous while abiding by the tax policies in place.
I hope this was a valuable breakdown of some potential year-end giving opportunities that you may come across. By giving with a generous heart and giving in a tax-efficient manner, we can ensure we’re maximizing the impact of our gifts all while worshiping God in the process.
Our advisors at the Christian Financial Advisors Network encourage you to remain in prayer about your generosity and the opportunities that you have.
As always, don't hesitate to reach out to one of our advisors if you need any assistance at all.
