A checklist to help you increase impact and reduce taxes

Coauthors: 
Caleb Lund, CAP®
Director of Charitable Strategies Group
Schwab Charitable™

Hayden Adams, CFP®
Director of Tax Planning and Wealth Management
Schwab Center for Financial Research

September 8, 2023

Many donors are looking for guidance on how to develop a charitable giving plan for the remainder of 2023. This follows a 3.4% decline in giving by Americans in 2022, only the fourth time in four decades that donations did not increase year over year, according to Giving USA’s Annual Report on philanthropy. Record-high inflation and interest rates, a turbulent stock market, and fear of a recession created an unusual giving environment last year.

Despite these factors, donors who had already contributed to donor-advised fund accounts at Schwab Charitable™ granted more than $4.7 billion to charities in 2022, which represents a 7% increase in dollars granted, or nearly $300 million more, compared to 2021.

As the economic environment has improved in 2023, we have seen a corresponding growth in donors asking for new ideas on how increase their philanthropic impact. We invite you to consider the following five actions that may provide more perspective on what to donate in the final months of the year.

Five actions for year-end 2023

1. Determine how tax benefits can help you support your goals or increase your impact.

An important first step in creating a year-end giving plan is to review the basic tax benefits or incentives available to you. The first benefit is the charitable deduction, which can reduce your taxable income if you itemize.^* Overall deductions for donations to public charities, including donor-advised funds, are generally limited to 50% of your adjusted gross income (AGI). The limit increases to 60% of AGI for cash gifts, while the limit for appreciated non-cash assets held more than one year is 30% of AGI. If your 2023 contribution and deduction exceed these AGI limits, the amount above limits may be carried over for up to five subsequent years.

Your instinct may be to donate cash, but donations of appreciated non-cash assets held more than one year can help you give even more to charity in two ways:

• First, regardless of whether you itemize deductions or take the standard deduction, you potentially eliminate the capital gains tax you would incur if you sold the asset first and donated the proceeds. This may increase your amount available for charity by up to 20%.^{^}
• Second, you may generally claim a charitable deduction for the fair market value of the asset, if you itemize, and may choose to pass on that income tax savings in the form of more giving.

Finally, if you are age 70½ and older and have a traditional IRA, you can consider a special tax benefit available with your account: directing up to $100,000 of Qualified Charitable Distributions (QCDs) in 2023 to operating charities (excluding donor-advised funds) tax-free.^§ While withdrawals from traditional IRAs are taxable income, QCDs are not. QCDs can also be used whether you take the standard deduction or itemize deductions, but note that you cannot claim a tax deduction for a QCD.

2. Consider bunching gifts to hurdle the 2023 standard deduction.

Knowing the basic tax benefits, your next question may be about how much to give to charity this year. The amount depends on your specific financial situation, whether you have large taxable events for 2023 (see action #5), and your desired charitable impact. Another important consideration is whether you plan to itemize or take the standard deduction.

For 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly. There also is an additional standard deduction for being age 65 or older or blind: $1,850 if your filing status is single, and $1,500 per person if your status is married filing jointly.

If your total itemized deductions are below those amounts, you may find it beneficial to “bunch” your 2023 and 2024 charitable donations together in 2023 to exceed your 2023 standard deduction. You could then itemize deductions on your 2023 tax return and take the standard deduction for 2024 taxes. This strategy may produce a larger total deduction over two years than two years of standard deductions, as shown in our bunching article.

Want to bunch donations while also giving to your favorite charities annually? Consider giving through a donor-advised fund account. Two or more years of charitable contributions can be made into your account in 2023, creating a 2023 tax deduction and potentially eliminating your capital gains taxes if your contribution is appreciated non-cash assets held more than one year. You can then recommend grants to charities from the account annually in the amount you normally give to charities each year.

3. Evaluate all investments to find the most tax-smart, high-impact donation.

As you consider how much you want to give to charity this year, also think about what you have to give. With help from your financial or tax advisor, identify non-cash assets you own that have appreciated in value and assess your potential tax liability if you were to sell the assets.

For instance, certain assets may have significantly appreciated over time and may result in a substantial capital gains tax burden upon sale, making them ideal assets to donate. Conversely, assets that are still in a growth phase may be better retained to continue accruing gains.

Appreciated non-cash assets to consider for donation include:

• Publicly traded securities—stocks, ETFs, mutual funds, and bonds
• Equity compensation awards
• Privately held business interests
• Private equity fund interests
• Restricted stock and IPO stock
• Real estate—residential, commercial, and land
• Fine art and collectibles
• Cryptocurrency

Schwab Charitable has an experienced team of charitable giving strategists who can assist you and your advisors in assessing potential donations of non-cash assets. The team will discuss a donation that is designed to optimize your tax benefits while potentially helping you achieve maximum charitable impact. Note that the charitable deduction amount varies by asset type.

4. Decide on whether to give now, later, or both.

When creating or updating your year-end giving plan, you may find it helpful to segment your charitable goals two ways: strategies for the current year and for the future, including extending your charitable legacy beyond your lifetime.

• Giving now: This allows you to witness the impact of your philanthropy, providing a sense of fulfillment and strengthening your connection to the causes you support. Additionally, you may be able to claim an immediate charitable deduction for your donation (if you itemize), potentially eliminate capital gains tax if a donation is an appreciated non-cash asset held more than one year, and give IRA assets tax-free through QCDs if you are at least age 70½.
• Giving later: You may opt for more complex charitable giving strategies, like designating a charity as a beneficiary of your life insurance policy or retirement accounts, or establishing a charitable gift annuity or charitable trust. These approaches allow you to retain control over assets during your lifetime while ensuring that your charitable intentions are fulfilled upon your passing. You may also enjoy estate tax benefits and potential income tax savings for yourself or your beneficiaries in the future.

The choice about when to give depends on your charitable goals, financial goals, family needs, estate planning objectives, and desired charitable legacy. Tax benefits, either now or deferred, are also a key factor.

5. Prioritize your donations based on your largest taxable events in 2023.

If you experience a large taxable event in 2023, contributing a portion of your assets can be an effective way to reduce your taxable income, offset or potentially eliminate capital gains taxes, and maximize support of your favorite charities and causes. Some scenarios where giving may reduce unexpected tax liabilities are:

• Unusual income year: Examples include bonus compensation and the sale of a home or business. In these scenarios, charitable giving can provide a valuable tax benefit. If you make tax-deductible donations to charities and itemize deductions, you may be able to reduce your taxable income or potentially offset the unexpected income taxes or capital gains taxes. This can be especially advantageous if you find yourself in a higher tax bracket due to increased earnings.
• Investment portfolio rebalancing: Rebalancing typically often involves selling appreciated assets that exceeded target allocations and buying depreciated assets that have become underrepresented in the portfolio. Selling appreciated assets will trigger capital gains income. To mitigate the potential tax liability, you can donate the long-term appreciated assets to a charity instead of selling the assets. This strategy allows you to potentially eliminate the capital gains tax and claim a charitable deduction for the fair market value of the donated assets.
• Retirement account withdrawals: If you are over age 59½ and have tax-deferred retirement accounts, you can use charitable donations and deductions, if you itemize, to help offset your tax liability on the amount you withdraw. In addition, if you are over age 70½ and have a traditional IRA, you can use QCDs, mentioned above, to satisfy all or part of your IRA Required Minimum Distribution (RMD).

What you can do next

December 31 is the donation deadline for 2023 tax deductions, so now is a great time to consider these five actions to help you increase your charitable impact and reduce your taxable income. We also encourage you to discuss these year-end charitable actions with your financial, tax, and legal advisors and to explore the related resources below on schwabcharitable.org: