Maximize Charitable Impact and Minimize Taxes with These Year-End Gifting Strategies

Year-end, and the holidays that accompany it, often motivate charitable giving. Year-end is also a time when investors focus on tax reduction strategies. These charitable gifts and tax reduction strategies are not mutually exclusive; in fact, they can be complementary.

Specific tax-deductible charitable giving strategies can help reduce tax burdens while also supporting charitable causes that are important to you. Here are some strategies you can consider to accomplish these dual goals.

Donate Cash While Tax-Loss Harvesting

The most common type of charitable giving is through cash donation. One way to generate cash flow for a gift is through “tax-loss harvesting.” For example, if you have securities that have declined in value from their original cost basis, you can sell those at a loss. You can use that loss to offset capital gains from other investments (and up to $3,000 of ordinary income) while also claiming a charitable deduction based on the total amount of cash donated.

Gift Publicly Traded Securities That Have Appreciated Over Time

Appreciated stocks, bonds, or mutual funds represent an increasingly popular method for making charitable donations. Most organizations are set up to accept these types of appreciated gifts. Public charities are exempt from federal taxation on most passive investment income, so they can sell the gifted securities without incurring the tax on capital gains that the donor would incur if the donor first sold the securities and then donated cash.

For the charitable deduction to be based on the full fair market value of the donated securities, it is important that the donor has held the securities for a year or more prior to donation (the gifted securities are long-term capital gain property).

Donate More Complex Non-Cash or Illiquid Assets

The process of donating complex non-cash or illiquid assets (e.g., equity compensation, restricted stock, shares of a private company, real estate, art, collectibles, cryptocurrency) can require more time and effort than donating cash or publicly traded securities. However, there are still advantages — especially if the assets have a low tax basis.

Issues to consider when donating these types of assets include:

• A qualified appraisal may be required before the donation to substantiate fair market value.
• Not all charities can handle such assets (however, most donor-advised fund programs can, and they often facilitate these types of donations for charities).
• Additional laws and regulations may apply, not only to the donor but also for the charities, so it is essential to consult your legal, tax, and financial professionals when considering donating these types of assets.

Charitable Donation + Roth Conversion

The potential benefits of the Roth IRA (including tax-free growth and tax-free withdrawals in retirement) make them a popular tool for tax-savvy retirement strategies. However, due to income limits, many cannot take advantage of a Roth IRA annual contribution. An alternative for those who can't make Roth contributions is the conversion of eligible retirement accounts (like a traditional IRA) into a Roth. While the conversion does trigger a current taxable event, charitable deductions can help offset the tax cost of a Roth conversion, thus mitigating current and potential future taxes. Remember that you may take nontaxable withdrawals from a Roth IRA if you are at least 59 ½ and the account has been held at least 5 years. Otherwise, earnings withdrawn may be subject to ordinary income tax and a 10% penalty.

Turn RMDs into QCDs

If you are subject to minimum distribution requirements (RMDs) from your IRA and plan to make a charitable contribution in the same year, choosing to make a qualified charitable distribution (QCD) from your IRA may be beneficial.

A QCD allows you to directly transfer funds from your IRA to a qualified charity that also satisfies the RMD for the year. Provided specific conditions are met, a distribution from an IRA that is a QCD is not taxable for federal income tax purposes, nor is it reported as a charitable deduction; therefore, it would not be counted against the federal charitable deduction limits and does not require itemization to be effective.

This strategy can also be appealing if you are already close to your charitable deduction limitations but would like to expand your giving.

Concentrate Multi-Year Giving

Concentrating several years’ worth of donations into a single year (provided you can do so), then skipping contributions for several years, can allow you to make a significant charitable impact while maximizing the tax deduction for your contributions.

Establish a Donor-Advised Fund

A donor-advised fund (DAF) is an account that allows you to make charitable contributions to a unique type of public charity (established to sponsor and act as administrator for the DAFs) and receive an immediate tax deduction. Then, in the future, you can direct contributions to other charities from the DAF.

A DAF can be a desirable option if:

• You want to make a tax-deductible charitable contribution this year, but still need some time to determine which charities you’d like to support with grant recommendations.
• You are considering a concentrated giving strategy with several years’ worth of contributions but would like to maintain annual gifting for specific charities.
• You are looking for a way to contribute complex non-cash or illiquid assets to charities that are not capable of taking those types of donations.
• You have charitable inclinations and are looking to mitigate the tax implications of year‐end bonuses or stock option exercises.

One of the attractive features of DAFs is that donated assets can be invested and earn returns without being taxed (subject to certain limitations), expanding the impact of future charitable gifting well beyond the initial gifted amount.

Optimizing the Impact of Your Charitable Contributions

Charitable contributions must be received by December 31, 2024, to qualify as tax-deductible charitable donations on 2024 tax returns. It’s important to consider that some non-cash contributions may take several weeks (or longer) to facilitate, and a 2024 RMD/QCD request should be submitted a month (or more) before year-end to ensure the request can be fulfilled by the IRA administrator by December 31, 2024.

These strategies can help if you’re looking to maximize your charitable impact and reduce tax burdens. As year-end deadlines approach, now is the time to consult your legal, tax, and financial professionals to discuss your goals. If you need help navigating any of these strategies, our experienced advisors can help.