Tax Implications of Charitable Planning/Giving Strategies – Update for 2022/2023
By: Marie Holliday, CPA, MBA, Managing Director
In late 2021, I presented “Tax Implications of Charitable Planning/Giving Strategies” to a DTCC virtual audience. The program gave an overview of changes for the 2021 and 2022 tax years as they related to charitable contributions. In addition, we looked at different charitable donation strategies and the tax benefits of each.
The purpose of this article is to review charitable contribution changes for 2022 and 2023. It’s never too early to begin planning your charitable giving strategies, not only for this year but for years to come.
What rules changed?
Generally speaking, the charitable donation strategies discussed in our original presentation remain unchanged. What has changed are the charitable contribution rules that were put in place during the pandemic. In effect, changes made to charitable giving in 2020 and 2021 have returned back to normal for 2022 and beyond. Here’s a summary of those changes:
- The temporary “above the line” charitable donations deduction for taxpayers claiming the standard deduction has ended. This was the $300 deduction ($600 for married filing jointly).
- The allowance for cash contributions up to 100% of AGI (adjusted gross income) in the 2020 and 2021 tax years expired. Cash contributions between 2022 and 2025 are limited to 60% of AGI. Cash contributions after 2025 will be limited to 50% of AGI.
- Corporate contributions have reverted back to the maximum allowable deduction of 10% of a corporation’s taxable income.
SECURE 2.0 Act of 2022 – Changes impacting your charitable giving strategy
In late December 2022, Congress passed the SECURE 2.0 Act. It has over 90 changes to help retirement savers and to urge more employers to offer retirement. While many of the changes begin after 2023, here are a few that could have an impact on your charitable giving strategy this year:
- Required Minimum Distribution (RMD) – The SECURE Act of 2019 bumped the RMD age from 70 ½ to 72 starting in 2020. The SECURE 2.0 Act of 2022 raises the RMD age to 73 for those turning 73 after 01/01/23. The RMD age will remain at 73 for a decade before jumping up to age 75 in 2033.
Furthermore, prior to SECURE 2.0, failing to take a RMD could trigger a 50% excise tax on the distribution shortfall. SECURE 2.0 reduces the penalty to 25% in all cases. In addition, the penalty drops down to 10% if the necessary RMD is taken by the end of the second year following the year it was due. These penalty-reduction provisions apply beginning in 2023.
- Allows a one-time election to a split-interest entity. Donors have the ability to make a qualified charitable distribution (QCD) of up to $50,000 to fund one of either a Charitable Remainder Unitrust (CRUT), Charitable Remainder Annuity Trust (CRAT) or Charitable Gift Annuity (CGA).
- Beginning in 2024, the limit for qualified charitable distributions, which is currently $100,000, will be indexed to inflation.
Strategies to maximize the tax benefit of charitable donations
Listed below are the charitable giving strategies we reviewed in our virtual presentation, along with a brief explanation. To learn about each option in more detail, please scroll to the bottom of this post to view the original recorded presentation. I noted with each option where you can find it in the video:
- Bunching of Deductions – the goal of bunching deductions is to position yourself so that you will have deductions greater than the standard deduction one year, with the following year being a standard deduction year. By itemizing deductions every other year, you can minimize your tax liability. (Detailed explanation begins at 18:00 mark of video.)
- Qualified Charitable Distributions (QCD) – A QCD is a tax benefit that allows owners of individual retirement accounts to transfer funds from their pre-tax IRA directly to qualifying charities, up to $100,000 annually per tax payer. The donated funds count toward satisfying the annual required minimum distribution but are excluded from income, thereby reducing adjusted gross income. This is a great option for taxpayers who don’t itemize – they can take advantage of the standard deduction AND give to charitable organizations. (Detailed explanation at 21:00 mark of video.) *NOTE: See comments above regarding SECURE 2.0 Act of 2022 and changes affecting QCD.
- Non-cash Gifting – This strategy involves gifting of longer-term appreciated stocks to charity. (Detailed explanation begins at 24:50 minute mark of video.)
- Donor-Advised Funds (DAF) – A donor-advised fund is like a charitable investment account, for the sole purpose of supporting charitable organizations you care about. One of the benefits of donating to a DAF is that you can take an immediate tax deduction at time of contribution, as opposed to waiting for a direct gift to charity. (Detailed explanation at 27:50 mark of video.)
- Private Foundations – A private foundation is a legal entity set up for charitable purposes but normally is set up by an individual or family rather than an entity that is “publicly supported”. The individual or family controls how the organization functions, e.g. Bill and Melinda Gates Foundation. (Detailed explanation at 33:30 mark of video.)
- Legacy Gifting – Also referred to as “Planned Giving” and can be through a will or other type of formal designation. Examples of legacy gifting instruments include Charitable Remainder Trust, IRA where you designate a charity as beneficiary, Charitable Lead Trust and Charitable Gift Annuity. (Detailed explanation at 35:45 mark of video.)
The information in this article is a brief overview of charitable giving strategies. For additional tax tips, please visit our Great Advice Corner. Be sure to consult with your financial advisor and accountant to determine the best options for your particular situation.
Marie Holliday is Managing Director at Cover & Rossiter. She is focused on finding tax-advantaged solutions for clients to influence future growth and sustainability.