Tax planning and charitable giving: What to consider now

Charitable giving comes in many forms. But whether it’s donating cash, cryptocurrency, publicly traded stock, real estate, a business, or something else, increasing your knowledge of tax planning strategies could help reduce the amount of money you may owe while potentially maximizing your gift.

“Taxes aren’t something many people prefer spending a lot of time thinking about,” says Bill Bardwell, CFP®, a philanthropic trust advisory specialist, senior vice president within the Wealth & Investment Management division. “But it can really be worth your time. It also means having discussions with your relationship manager, CPA, attorney, and other wealth advisors to make sure all the nuances are covered.”

Here, Bardwell shares some things you should consider when it comes to tax planning and charitable giving.

When tax planning for 2023

• If you expect to realize significant gains in 2023 from investment transactions or the sale of a business or real estate, consider implementing a charitable giving strategy to help reduce your tax bill. Your tax and other financial advisors can help outline a number of strategies to consider.
• Review your expected itemized deductions. If your itemized deductions are less than the standard deduction, your charitable contributions are not reducing your tax bill. Evaluate “bunching” several years’ worth of charitable contributions into a single year. This may increase your itemized deductions above the standard deduction threshold so you can receive a tax benefit for those gifts. Consider utilizing a donor-advised fund for “bunching” your charitable gifts: You may receive the tax benefit at the time you contribute to the donor-advised fund and then have the flexibility to recommend grant distributions to one or more charitable organizations on their own personal timetables.
• If you are age 70½ or older, consider the potential benefits of a qualified charitable distribution (QCD). A QCD allows you to make a tax-free gift of up to $100,000 each year directly from your IRA (traditional or inherited, or inactive SEP or SIMPLE IRAs) to qualifying charities (exclusions include donor-advised funds and private non-operating foundations). Tax law in effect as of January 2023 increased the required minimum distribution (RMD) age to age 73 in 2023 (age 75 in 2033). A QCD counts toward satisfying your RMD once you reach age 73 without the federal tax consequences of being included in your adjusted gross income (AGI). QCDs prior to age 73 are still not included in a donor’s gross income.¹

Considerations when gifting to individuals

• Evaluate the tax benefits of gifting long-term appreciated stock held longer than one year versus cash. Your cost basis and holding period will transfer to the recipient. If the recipient is in a lower capital gains bracket than you, some tax savings may result when the recipient sells the stock. If the recipient is under age 24, make sure you are familiar with the “kiddie tax” rules.
• If you gift stock that is in a loss position, the recipient cannot claim your loss as a deduction. However, any appreciation in the stock from the value on the date of the gift up to your original basis will not be taxable to the recipient. To maximize the capital loss deduction opportunity, consider selling the stock, using the loss yourself, then gifting the cash proceeds.
• Be aware of the five-year gift rule when gifting to a 529 plan for education costs. You may elect to gift five years of annual exclusion gifts in one year without using your lifetime gift exclusion. For 2023, the annual exclusion amount is $17,000, meaning the five-year rule allows an $85,000 gift to a 529 plan for each beneficiary. A married couple could transfer up to $170,000 out of their estate in one year for each beneficiary. Keep in mind this is subject to recapture if the donor dies before the five-year gift period has passed; no other gifts may be made to the beneficiary within the five-year period.
• Special and beneficial tax rules apply for certain gifts. You can directly pay school tuition or medical expenses for someone else without limitation. If the expenses are paid directly to the school or medical provider for the benefit of someone else, they do not count against the annual exclusion or lifetime gift exclusion.
• Gifts to individuals are not considered taxable income to the recipient and are not deductible by the giver for federal income tax purposes. Some states allow deductions, and some allow credits for gift contributions to a 529 plan.

Consider giving strategies throughout the year

Bardwell stresses that tax planning and charitable giving should be something that you consider year-round — not just at year-end. In fact, tax planning and charitable giving should be considerations before any major financial transaction is taking place.

“We have seen some clients who sell an asset (such as a business or real estate) and call after the fact, unfortunately resulting in their missing out on some potential tax benefits,” Bardwell says.

Plus, thinking of charitable giving as a year-end activity means that you could be missing out on the ability to make a larger impact with your gifts. “If you’re waiting until the end of the year before considering donating money, you may have missed opportunities to assist those in need,” he says. “Thinking about the effects of the pandemic and now inflation, both have exposed a lot of needs out there that aren’t limited to a certain time of year.”

Communicating with your relationship manager and tax and legal advisors on a regular basis can also help you stay informed about any upcoming changes in tax laws, Bardwell adds. That knowledge can help you stay proactive so you can maximize your giving.

1. irs.gov