By Michael Torney, CFP, J.D., LL.M.
Despite the stock market’s recent downturn, many people will plan this year to donate money to their favorite nonprofit organizations. But with nearly everyone taking a closer look at all of their expenses, it may also be a good time to re-examine these charitable contributions – and particularly the tax benefits a person can receive.
With the 2021 tax year now behind us, here are five easy ways to continue helping your favorite nonprofit organization while making the best use of tax strategies in 2022:
Don’t Give Cash
Changes in the federal tax laws in recent years have raised the standard income tax deduction. Unfortunately, this has made it more difficult for a person to reduce their taxes owed by writing a check since many people are better off taking the standard deduction than itemizing deductions on their returns. For 2022, the standard deduction is $12,950 for single filers and $25,900 for couples. In 2020 and 2021, there were special tax deductions for non-itemizers that gave cash contributions to charity, but that deduction is not available in 2022. If you plan to give away a few thousand dollars, it probably doesn’t make sense to give cash, so look for other ways to make this gift. Below are a few alternatives.
Bunch Your Donations into One Tax Year
If you usually give $5,000 each year, consider giving $15,000 in 2022. By doing so, it may allow you to receive a tax benefit for your donations, by making your total itemized deductions larger than your standard deduction. For instance, if you anticipate larger than average medical expenses, this amount can be added to common deductible items, which include state and local income or sales taxes, real estate taxes, personal property taxes and mortgage interest. Combined, these expenses may make itemizing deductions a better way to go.
Donate Stock That’s Appreciated
There are several key advantages for investors who donate some of their long-term, appreciated stock holdings from an after-tax investment account. By contributing this stock to a charitable organization, you pay no taxes on the gains from the stock. At the same time, the charity receives the full value of the gift and your charitable deduction is usually based on the fair market value on the date donated.
For example, shares of Apple Inc. hit a high of $44.10 in 2017, nearly one-fourth of its recent high. If an investor purchased shares at that price and sold 100 shares this year for $151.10, they could donate the proceeds to charity, but then they would need to use other cash to pay tax on the $10,700 capital gain. Instead, the investor could donate the 100 shares of Apple directly to the charity and avoid paying the tax on the gain since purchase. This strategy makes sense for anyone that would need to sell the stock eventually, since it permanently avoids paying tax on the gain.
Consider a Donor-Advised Fund (DAF)
This fund allows one to contribute cash, stock or other assets and receive a full tax deduction in the year of the gift while making grants to charities that can be spread out over several years.
You can combine this strategy with the bunching strategy and the appreciated stock strategy. This year, one of our clients chose to fund five years of charitable contributions to the donor advised fund – bunching allowed her to itemize her deductions. This money can remain in the fund and be invested appropriately over the next five years.
In addition, she contributed appreciated stock from 15 years ago and saved herself the 20% of capital gains tax she would have paid on the stock. The icing on the cake? She can contribute cash to the investment portfolio, buy the stocks again, and reset her basis.
Once the DAF is set up, making donations is easy. Many clients simply send us an email with the name of the charity and the amount to be donated. We handle the contribution from there and send a follow up email when the gift is completed.
For Those 70.5 and Older, Consider a Qualified Charitable Distribution (QCD) Strategy
A QCD is a distribution made directly from your individual retirement account (IRA), other than a SEP or SIMPLE IRA, to a qualified charity. And because people are required to withdraw a minimum amount from these accounts at age 72, using a QCD to do it will save money on your tax bill.
Here’s how it works. If a person is required to withdraw $100,000 from their taxable accounts this year, they will pay taxes on the entire $100,000. However, if a $20,000 contribution is made through the QCD, they only owe tax on the remaining $80,000 – a savings of several thousand dollars.
As you consider one or more of these strategies, it may also be a good time to re-examine these charitable contributions — the amount of the donation, the organizations receiving your money, or both.
For example, you may have lost touch with key leaders at your one-time favorite charity, or one of your children would prefer to begin supporting other organizations. Taking time to address these issues will help determine if you are still meeting the goals you’d like to accomplish with your contributions.
If you have questions about your charitable giving and need to discuss a tax strategy, our team can be reached at DuffTorneyteam@monetagroup.com. We offer a free consultation to evaluate how we can aim to meet your philanthropic goals while saving money on taxes.
2022 Moneta Group Investment Advisors, LLC. All rights reserved. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax, or legal decision. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.
