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Year-End Charitable Gifting

Year-End Charitable Gifting

November 16, 2023

Are you making charitable donations at year's end? If so, you should know about some of the financial "fine print" involved, as the right moves could potentially bring more of a benefit to both you and your chosen charity.

Keep in mind that this article is for informational purposes only and is not a replacement for real-life advice. Make sure to consult your tax, legal, or accounting professionals before modifying your charitable gifting strategy.

Evaluate the Impact

How can you maximize the impact of your gifts? First, consider giving to a qualified charity with 501(c)(3) nonprofit status. Also, Charity Navigator, Charity Watch, and GiveWell have websites that offer information to help you evaluate a charity and learn about how effectively it utilizes donations. If you are considering a large donation, it is often wise to ask the charity involved how it will use your gift.

If you're still working, you may want to check with your employer. Some companies match charitable contributions made by their employees, an often-overlooked opportunity to give back.

Itemize to Optimize

To deduct charitable donations, you must itemize them on IRS Schedule A. So, you'll need to log each donation you make. Ideally, the charity will provide you with a form to document proof of your contribution. If the charity does not have such a form handy (and some do not), a receipt, a credit or debit card statement, a bank statement, or a canceled check can work. The IRS may want to know three things: the name of the charity, the gifted amount, and the date of your gift.1

Remember, itemized deductions may only have tax benefits when they exceed the standard income tax deduction, so be sure to check on the standard deduction amount for your tax filing year.

Show Your Appreciation

Many charities welcome non-cash donations. In fact, donating an appreciated asset can be a tax-savvy move. You may wish to explore a gift of highly appreciated securities. Selling securities can lead to a taxable event. As an alternative, you or a financial professional can write a letter of instruction to a bank or brokerage, which can facilitate authorizing a transfer of shares to a charity.

This transfer can accomplish three things:

  • You can manage paying the tax you would normally pay upon selling the shares.
  • You may be able to take a current-year tax deduction for the full fair market value of the shares.
  • The charity gets the full value of the shares, not their after-tax net value. This can be a winning strategy all around.1

Qualified Charitable Distributions

For individuals who are philanthropically inclined and looking for tax-efficient ways to support their favorite charities, Qualified Charitable Distributions (QCDs) present a compelling option. QCDs allow eligible individuals to make direct transfers from their Individual Retirement Accounts (IRAs) to qualified charities, offering both the donor and the charity unique advantages. To take advantage of Qualified Charitable Distributions, individuals must meet certain eligibility criteria:

  1. Donors must be at least 70½ years old. This age threshold aligns with the age at which individuals were previously required to start taking Required Minimum Distributions (RMDs) from their retirement accounts. While the RMD age has increased, the age threshold for QCDs remains at 70½.

  2. QCDs apply specifically to Traditional IRAs. Roth IRAs, 401(k)s, and other retirement accounts do not qualify.

  3. The maximum amount eligible for a QCD is $100,000 per individual per year. For married couples filing jointly, each spouse can make a separate QCD, potentially doubling the impact. The QCD can be less than, equal to or greater than the RMD. 

Once eligible, individuals can instruct their IRA custodian to transfer funds directly to qualified charities. The funds must never pass through the donor's hands to retain their tax benefits. QCDs can satisfy part or all of the donor's Required Minimum Distributions for the year. This feature is particularly advantageous for individuals who may not need the entire RMD for personal expenses. Perhaps the most significant advantage of QCDs is the potential for a tax-free transfer. The distributed amount is excluded from the donor's taxable income, lowering their adjusted gross income (AGI). This can have a positive impact on the donor's tax liability, potentially resulting in lower Medicare premiums and minimizing the impact on other deductions and credits. Donors should maintain proper documentation for their QCDs, including records of the transfers and acknowledgment from the charities. This documentation is essential for tax reporting purposes.

A Policy of Giving Back

Do you have a life insurance policy? If you make an irrevocable gift of that policy to a qualified charity, you can get a current-year income tax deduction. If you keep paying the policy premiums, each payment may become a deductible charitable donation. (Deduction limits can apply.) If you pay premiums for at least three years after the gift, that could reduce the size of your taxable estate. The death benefit may be transferred out of your taxable estate, in any case.2

You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments. Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications.

Whatever your situation, getting advice from a tax or financial professional can help you give wisely as the year comes to a close. We're here to help find a strategy that works for your situation.

1., 2023
2., March 2, 2023

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2023 FMG Suite.