It’s that time of year, during the holiday season, that we think about incorporating gifting, both charitable and otherwise, into strategic year-end tax planning. Income tax deductions allow you to enhance your charitable giving, and you can improve your estate tax planning by making the most of the annual gift exclusion. As you decide what type of assets to gift (cash vs. noncash/securities), carefully consider both tax and estate planning goals, paying close attention to cost basis impact with regard to highly appreciated assets.
We spoke with Wealth Advisor Christine Waldschmidt, JD, for insight about year-end gifting in 2023.
Income Tax Deduction for Charitable Gifts
If you itemize deductions on your income tax return, you can generally deduct your gifts to qualified 501(c)(3) organizations. These include qualifying public charities, private foundations, religious organizations, and other nonprofit entities. Typically, you will choose to itemize if your total qualifying deductions exceed the available standard deduction.
2023 Standard Deductions (IRS)
Filing Status Amount
Single $13,850
Married filing jointly $27,700
Head of household $20,800
“You can usually deduct gifts to qualified charities up to a certain percentage of your adjusted gross income (AGI),” Waldschmidt says. “The limits are as follows: 60% of AGI for cash gifts, 50% of AGI for certain types of noncash gifts, and 30% of AGI for long-term appreciated assets, such as stocks and property, that you've held for more than one year. Also, you typically can carry over disallowed charitable deductions (in excess of AGI) and deduct them over the next five years, subject to the income percentage limits in those years.”
Bunching Your Charitable Contributions
You may find that the total of your itemized deductions for 2023 will be below the level of your standard deduction. In that circumstance, it could be beneficial to combine or “bunch” your 2023 and 2024 charitable contributions into one year (2023) if that pushes you over the standard deduction amount. You can then itemize in 2023, getting the benefit of the larger itemized deduction amount, and then take the standard deduction on your 2024 return. In addition to providing a larger charitable impact in 2023, this strategy can increase your total two-year deduction, providing a greater tax benefit than just taking the standard deduction in both years.
“If you want to take advantage of the bunching strategy but want the benefits of your philanthropy to be distributed over time, consider a gift to a donor-advised fund,” Waldschmidt says. “This allows the donor to separate the timing of their gift for tax purposes from the decision about where and when to give. You can take a large tax deduction in 2023 with the contribution to the donor-advised fund and then recommend grants to your chosen charities in 2024.”
Gifting Appreciated Property
Charitable gifting of appreciated assets is particularly valuable, as it enables the donor to deduct the full market value of the gift without having to realize and pay tax on the capital gains. For this reason, it can be more advantageous to gift appreciated assets charitably, as non-qualifying recipients of appreciated assets will receive a carryover basis for gifts made during life and will then have to realize and pay capital gains tax upon their sale of the assets. You will want to be sure to retain proper documentation to substantiate the valuation of any noncash assets gifted charitably.
Qualified Charitable Distribution from an IRA
If you are charitably inclined and over 70 ½ years of age, a smart way to meet your gifting goals is to use a Qualified Charitable Distribution (QCD) from an IRA. You can use this QCD to fulfill all or part of your annual required minimum distribution (RMD), avoiding taxation of that amount as ordinary income. The QCD is a nontaxable distribution made directly by the trustee of your IRA (other than an ongoing SEP or SIMPLE IRA) to an organization eligible to receive tax-deductible contributions up to $100,000 per person.
“This charitable distribution is not included in your AGI and thus allows a tax break even if you can’t itemize and are taking the standard deduction,” she says. “There is a further benefit in gifting from an IRA rather than from taxable assets, as this can reduce your taxable income in future years while lowering your taxable estate and potentially reducing your beneficiaries’ future income tax liability.”
Timing Your Charitable Gifting
It is always wise to look at your marginal tax rate and how that may change from one year to the next when timing your charitable giving. The higher your marginal rate, the more valuable the deduction. Thus, whether you think your marginal tax rate is going up or down from one year to the next will help you decide whether to make that gift before December 31 of the current tax year or wait until after January 1 of the following year.
“It is also important to remember that you must complete the gift by December 31 for it to count for the current tax year,” Waldschmidt says. “Thus, a check must have cleared, title transferred, etc., or the gift is incomplete and will fall into the following tax year.”
Annual Exclusion Gifting
Under the federal unified estate and gift tax (IRS 2023 limits), every individual can make an annual gift of up to $17,000 to any single donee (recipient) with no estate or gift tax consequence or filing requirement. Thus, a couple trying to reduce a taxable estate and pass it to their children could together gift $34,000 to every child and grandchild under this annual gifting exclusion. This can be a useful planning tool for people facing taxable estates. In 2023, taxable estates of more than $12,920,000 ($25,840,000 for married couples) will pay up to a 40% estate and gift tax on amounts (not given to qualifying charities) above those limits.
“It may be most beneficial to gift cash for annual exclusion gifting rather than an appreciated asset because a noncash gift made during the donor’s life is transferred with a carryover basis,” she says. “As previously mentioned, this means that the donee would have to realize and pay any applicable capital gains tax when selling the asset. Appreciated assets included in the donor’s gross estate that are passed at death will typically receive a step-up in basis, so the recipient will never realize that capital gain. The donee in that scenario receives the asset with a basis equal to the market value at the date of death. While it may still make sense to gift appreciated assets during life, as a part of larger estate tax planning strategies, it is always important to consider basis issues when gifting.”
First Business Bank’s Private Wealth experts can help you evaluate how to best make your year-end gifts, charitable and otherwise, in a manner that furthers your goals while minimizing tax consequences.
Updated: 11/27/2023
Disclaimer
The tax information provided herein is general and educational in nature, and should not be construed as legal or tax advice. First Business Bank does not provide legal or tax advice. Content provided relates to taxation at the federal level only. Rules and regulations regarding tax deductions for charitable giving vary at the state level, and laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of the information provided. As a result, First Business Bank’s Private Wealth team cannot guarantee that such information is accurate, complete, or timely. Tax laws and regulations are complex and subject to change, and changes in them may have a material impact on pre- and/or after-tax results. First Business Bank makes no warranties with regard to such information or results obtained by its use. First Business Bank disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.
