Beyond the Basics: End-of-Year Charitable Giving

Beyond the Basics: End-of-Year Charitable Giving

* This article was originally published on Dec. 14, 2022. It has been updated for 2023.

From your own holiday shopping list to your favorite public media outlets highlighting their donor gifts, ‘tis the season for giving! December is only one of the twelve months of the year but, according to Nonprofit Source, 30% of charitable giving takes place in December. That means it’s time to consider how you can strategize your philanthropic efforts before year-end. So get ready to make your charitable dollars go further and take advantage of tax deductions while you positively impact the causes you care about.  

Doubling Your Donations

Did you know? Employees give an estimated $2-3 billion annually through employer charitable matching programs. However, $4-7 billion in matching gifts goes unclaimed every year.

Before the year is up, look at your employee benefits guide to see if your employer offers any matching charitable donations. If available, coordinate with your human resources team to see if your employer will match any of the donations you’ve already made this year. Or see if they’ll match any future contributions you make before year-end. Don’t forget to save your receipts of final pay stub of 2023 for tax time!

Bunching Your Charitable Donations

Will you be itemizing your deductions on your federal tax return this year? To claim a deduction on a charitable contribution, keep in mind that you’ll have to itemize deductions, which must exceed the standard deduction. For 2023, the standard deduction for single taxpayers is $13,850. For married taxpayers filing jointly, the 2023 standard deduction is $27,700. 

If your itemized deductions will make it over that threshold, there’s a 60% adjusted gross income (AGI) limit on deductions for cash donations. And if you’re almost there,  you might consider donating to charity — and enjoying the potential tax benefit. Using a strategy called bunching, this could be a win-win.

Bunching means you contribute at least two years’ worth of deductible expenses in one year. This allows you to increase your itemized deductions beyond the standard deduction. 

Pro Tip: Consider donating multiple years’ worth of your charitable contributions to a donor-advised fund (DAF). This charitable giving vehicle then allows you to space out your dollars donated to charities over multiple years all while claiming a higher tax deduction in the year you contributed to the DAF. 

Sticking with the standard deduction on your federal taxes for 2023? Keep in mind that you may still be able to claim a deduction on your state tax return. In Colorado, a charitable contribution subtraction applies to donations of over $500 to qualified organizations. 

Converting to Roth — and Offsetting Taxes

Moving dollars out of pre-tax retirement accounts and into after-tax arrangements brings the advantage of tax-free growth. If you’ve reviewed your tax situation and have some room in your current tax bracket or the next to complete a Roth conversion, you could be looking at years of tax-free growth plus tax-free distributions down the road. 

The downside to IRA conversions is that you have to recognize the dollars you convert as ordinary income. So you’ll have a higher taxable income for 2023 without earning additional dollars. A way to offset the amount of taxes due is by increasing your charitable contributions. You can use bunching and/or a DAF to coordinate this strategy.

Making Qualified Charitable Distributions (QCDs)

If you’re over 70 ½, you can make what’s known as qualified charitable distributions (QCDs). This means that you can give up to $100,000 directly from your IRA to a 501(c)(3) this year. If you’ve reached the required minimum distribution (RMD) age, you can use this strategy to fulfill your RMD. Haven’t yet reached your required beginning date for those distributions? You can take advantage of QCDs to reduce the amount you’ll need to distribute via RMDs in the future.

With this strategy, you don’t add the money to your taxable income. You do, however, accomplish your charitable giving goal and avoid paying taxes on the amount that you donate.  Keep in mind that you do need to give directly to a public charity to take advantage of QCDs.

Talking Charitable Giving

In addition to what it can do on an individual’s tax return, charitable giving has a much larger impact on our communities. If talking openly about your philanthropic efforts fits your family’s style, you may also prepare for family gatherings by starting the conversation about how, where, and why you’ll give this year. 

No matter where you are in your charitable giving journey, you can improve your strategies over time and invite others to join you. If you’re considering making a large donation — as opposed to smaller, more spread-out donations — let’s talk. And if you want to have a conversation about charitable giving and how it can impact your tax situation and overall financial plan, schedule a quick consultation.