Tips for Making Year-End Charitable Gifts

It’s hard to believe that we are nearing the end of 2023. Now is a great time to review your overall income tax picture, as well as your charitable giving, to determine how some last-minute charitable gifts can positively impact your tax bill while also benefiting the community.

The IRS allows as an itemized deduction gifts of cash or property to organizations qualified under section 170(c) of the Internal Revenue Code. If you are struggling to determine if the organization you wish to donate to is qualified, the IRS website provides a tax-exempt organization search tool that easily helps you determine an organization’s status.

For 2023, the charitable deduction limits are set at 60% of your adjusted gross income for cash gifts to public charities. Donated property is limited to 50% of your adjusted gross income and 30% for donations of capital gain property (stocks, etc.).

For taxpayers who do not consistently itemize their deductions, the giving strategy known as “bunching” can be a great way to maximize the tax benefits of their charitable donations. This is accomplished by “bunching” the charitable contributions of two tax years into one. The thought is that paying two years’ worth of charitable contributions in one year will push you over the standard deduction ($27,700 in 2023 for married couples filing jointly) and allow you to itemize and enjoy the benefit of the larger charitable contribution deduction. Then, in the following year, you would make smaller or no charitable contributions and take the standard deduction. This “prepaying” or “bunching” strategy allows you to maximize the benefits of your itemized deductions in one year and the standard deduction in the next.

Taxpayers with required minimum distributions from their IRAs should consider making a qualified charitable distribution directly from their IRA. This can be done by instructing the IRA custodian to send a check directly to the charity of the taxpayer’s choosing instead of the taxpayer receiving the money themselves and then writing a check to the charity. During 2023, charitable contributions directly from an IRA up to $100,000 per person can reduce the taxpayer’s income dollar for dollar and count against a taxpayer’s required minimum distribution. This is an especially good strategy for those taxpayers who do not itemize their deductions and thus do not benefit from the charitable deduction.

Donor-advised funds are another great charitable giving strategy. A donor-advised fund is a separately identified fund or account maintained by an IRC Section 501(c)(3) organization. These organizations are known as the sponsoring organization. Once the donor makes the irrevocable contribution to the donor-advised fund, the sponsoring organization has legal control over the funds, although the donor typically retains the right to make recommendations as to how and when grants are paid out to eligible charitable beneficiaries of their choosing. The funds are invested, and their growth can lead to increased charitable giving in the future. The donor gets an up-front charitable deduction in the year of the contribution to the donor-advised fund.

One of the best charitable giving strategies is donating appreciated stock held for longer than one year. This allows the taxpayer an itemized deduction for the fair market value of the stock without having to sell the stock and recognize the gain.

For example, let’s say Kate purchased 100 shares of Exxon stock at the end of 2019 for $6,978. In November of 2023, she is thrilled that her 100 shares of Exxon stock have grown in value to $10,274 and wants to donate the proceeds to her church. If she sells the stock and then donates the proceeds, she will have to pay tax on the gain and then take a charitable deduction. If she donates the stock directly to the church, she receives a charitable deduction of $10,274 and avoids having to recognize a capital gain and pay tax on the sale of the Exxon stock.

Here are several more useful hints to remember when donating close to the end of the year. For a mailed donation to be counted for the 2023 tax year, it should be postmarked no later than Dec. 31, 2023, even if the charity does not receive the check until early January 2024. Donations made by credit card are deductible through Dec. 31, 2023, even if you do not receive your credit card statement until January of 2024. Finally, be sure to receive written acknowledgment of your gift from the charity and keep this acknowledgment with your 2023 tax records in case you ever need to support the donations you made.

Charitable contributions can be an excellent tool for positively impacting the community and, if done correctly, lowering your tax bill. If you have questions about year-end tax planning or charitable contributions, be sure to reach out to your CPA or tax preparer or contact Heard, McElroy & Vestal by calling (800) 241-0151 or emailing hmv@hmvcpa.com.

Christopher Eldredge, CPA, manager at Heard, McElroy & Vestal, LLC.