As we approach the end of the year, we give thanks for our blessings and consider again how to make a positive difference.  Research confirms that generosity is its own reward.  In giving, we feel better about ourselves, we reinforce the values we hold dear, and we set an example for our friends and families to follow.

And, if you can do good and do well at the same time, why not?  Indeed, understanding some of the rules surrounding charitable giving can help you be more strategic about giving.   It may even lead you to give more.  With this in mind, the Estate Planning group at Eckberg Lammers, P.C. offers the following short primer on the tax considerations involved with charitable donations.

Federal Income Tax Deductions for Charitable Contributions

Deductions for Itemizers

You will need to itemize in order for charitable donations to reduce your income tax bill.  That means your total itemized deductions – including charitable contributions – will need to clear the 2023 standard deduction of $13,850 for a single person or $27,700 for a married couple filing jointly.  You may wish to consider your other sources of deductions such as mortgage interest, state and local taxes, and medical or dental expenses to evaluate your prospects for a tax break from the charitable deduction.

A common alternative, however, is “bunching” your charitable giving.  This involves concentrating yearly donations into a single year to qualify for a deduction rather than making separate annual gifts where no single contribution would exceed the standard deduction by itself.

Contributions of Capital Gain Property

Suppose that instead of giving $1,000 in cash to charity, you gave the same amount in appreciated stock which you purchased five years ago for $100.  This approach improves your tax situation in two ways: you avoid the inclusion of $900 in capital gains income on your taxes, and you get a deduction equal to the fair market value of the asset you contribute.  Of course, many charities may lack the ability to convert that asset into cash.  This is one of the ways in which using a donor-advised fund (discussed below) can simplify your giving: the financial institution can handle the liquidation for you and disburse the funds to your selected charities.

Deduction Limits Vary

Bear in mind that the extent of the deduction will depend on the type of charity and the type of donation.  Some of the key rules can be summarized as follows:

• Cash contributions to public charities and certain other organizations such as donor advised funds are eligible for deductions up to 60% of AGI.
• Non-Cash Contributions (such as donated clothing) made to a public charity is subject to a deduction limit of 50% of AGI.

• Contributions of capital gains property to public charities are generally limited to a deduction of 30% of AGI. You can choose the 50% AGI limit, but then the reported donation must be reduced to the property’s cost basis (example: what you paid for it rather than for market value or other basis.)

• Cash contributions to private foundations are limited to a deduction of 30% of AGI.

• Contributions of capital gains property to private foundations are limited to a deduction of 20% of AGI.

Transfer Distributions from Your IRA

If you are over the age of 70½, consider making a qualified charitable distribution (QCD) from your IRA.  In lieu of taking a required minimum distribution (RMD) from the account, the funds (up to $100,000) are transferred directly from the IRA to the charity.  As a result, the RMD does not qualify as income to you (and is therefore not taxed), the transfer also does not count against the AGI limits discussed above, and the charity receives a significant benefit.

For further information on the advisability of these strategies, we encourage you to contact your financial planner.  If you do not have one, we are happy to make recommendations.

Donor-Advised Funds

Throughout this post, we’ve referred to donor-advised funds.  This involves making a donation to a public charity or a community foundation (e.g., the St. Croix Valley Foundation), and the charity establishes an account named for the donor.  The donor then makes recommendations for grants to be made to various charities from the account.  This can simplify giving by centralizing your contributions in one place – and thus you receive one receipt for tax reporting – even if you plan to give to several charities.  It also can help establish a legacy as the fund continues to grow. Your children can serve as advisors to the fund after you have passed away.

Contact our Team Today

If you have any questions regarding this blog or other content please reach out to our Estate Planning team at (651) 439-2878 or contact@eckberglammers.com