Written by: Caleb Lund, CAP® and Hayden Adams, CFP®
A checklist to help your clients increase impact and reduce taxes.
Are you looking for opportunities to provide more value and deepen relationships with HNW individuals and families? Talking to clients about philanthropy allows you to expand your role as a trusted advisor and connect with them in a meaningful way. This article offers a simple framework you can use to begin a dialogue and help your clients be more strategic with their charitable giving.
Many donors are looking for guidance on how to develop a charitable giving plan for the remainder of 2023. This follows a 3.4% decline in giving by Americans in 2022, only the fourth time in four decades that donations did not increase year over year, according to Giving USA’s Annual Report on philanthropy. Record-high inflation and interest rates, a turbulent stock market, and fear of a recession created an unusual giving environment last year.
Despite these factors, donors who had already contributed to donor-advised fund accounts at Schwab Charitable™ granted more than $4.7 billion to charities in 2022, which represents a 7% increase in dollars granted, or nearly $300 million more, compared to 2021.
As the economic environment has improved in 2023, we have seen a corresponding growth in donors asking for new ideas on how to increase their philanthropic impact. Consider walking your clients through the five steps below to help guide them on what to donate in the final months of the year.
Five actions for year-end 2023
1. Determine how tax benefits can support your clients’ philanthropic goals or increase their impact.
An important first step in creating a year-end giving plan is to help your clients understand the basic tax benefits or incentives that are available to them. The first benefit is the charitable deduction, which can reduce taxable income for those who itemize.* Overall deductions for donations to public charities, including donor-advised funds, are generally limited to 50% of adjusted gross income (AGI). The limit increases to 60% of AGI for cash gifts, while the limit for appreciated non-cash assets held more than one year is 30% of AGI. For clients whose 2023 contribution and deduction exceeds these AGI limits, the amount above limits may be carried over for up to five subsequent years.
Most people are inclined to donate cash, but donations of appreciated non-cash assets held more than one year can help your clients give even more to charity in two ways:
- First, regardless of whether donors itemize deductions or take the standard deduction, they potentially eliminate the capital gains tax they would incur if they sold the asset first and donated the proceeds. This may increase the amount available for charity by up to 20%.^
- Second, those who itemize may generally claim a charitable deduction for the fair market value of the asset, and may choose to pass on that income tax savings in the form of more giving.
Finally, clients who are age 70½ and older and have a traditional IRA can take advantage of a special tax benefit: they may direct up to $100,000 of Qualified Charitable Distributions (QCDs) in 2023 to operating charities (excluding donor-advised funds) tax-free.§ While withdrawals from traditional IRAs are taxable income, QCDs are not. Clients may make QCDs regardless of whether they take the standard deduction or itemize deductions, but note that they cannot claim a tax deduction for a QCD.
*A donor’s ability to claim itemized deductions is subject to a variety of limitations, depending on the donor’s specific tax situation. Donors should consult their tax advisors for more information.
^The federal long-term capital gains tax rate is 0%, 15%, or 20%, depending on the donor’s income level. The rates do not take into account any state or local taxes or the Medicare net investment income surtax.
§Operating charities, or qualifying public charities, are defined by Internal Revenue Code section 170(b)(1)(A). Donor-advised funds, supporting organizations, and private foundations are not considered qualifying public charities.
2. Consider bunching gifts to hurdle the 2023 standard deduction.
Once your clients understand the basic tax benefits of charitable giving, their next question might be about how much to give to charity this year. The amount depends on their specific financial situation, whether they have large taxable events for 2023 (see action #5), and their desired charitable impact. Another important consideration is whether they plan to itemize or take the standard deduction.
For 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly. Those who are over the age of 65 or blind can take an additional standard deduction of $1,850 for single filers, or $1,500 per person for married couples filing jointly.
Clients whose total itemized deductions are below those amounts may find it beneficial to “bunch” their 2023 and 2024 charitable donations together in 2023 to exceed their 2023 standard deduction. They could then itemize deductions on their 2023 tax return and take the standard deduction for 2024 taxes. This strategy may produce a larger total deduction over two years than two years of standard deductions, as shown in our bunching article.
Here is a strategy to explore for clients who want to bunch donations while also giving annually to their favorite charities. They may want to consider giving through a donor-advised fund account. They can combine two or more years’ worth of charitable contributions into their account in 2023, creating a 2023 tax deduction and potentially eliminating capital gains taxes if they contribute appreciated non-cash assets held more than one year. They can then recommend grants to charities from the account annually in the amount they normally give to charities each year.
3. Evaluate all investments to find the most tax-smart, high-impact donation.
As your clients consider how much they want to give to charity this year, you can add value by showing them the most tax-effective assets to give. You (or their tax advisor) can identify non-cash assets they own that have appreciated in value and help them assess their potential tax liability if they were to sell the assets.
For instance, certain assets may have significantly appreciated over time and may result in a substantial capital gains tax burden upon sale, making them ideal assets to donate. Conversely, assets that are still in a growth phase may be better retained to continue accruing gains.
Appreciated non-cash assets to consider for donation include:
- Publicly traded securities—stocks, ETFs, mutual funds, and bonds
- Equity compensation awards
- Privately held business interests
- Private equity fund interests
- Restricted stock and IPO stock
- Real estate—residential, commercial, and land
- Fine art and collectibles
Schwab Charitable has an experienced team of charitable giving strategists who can assist you and your clients in assessing potential donations of non-cash assets. The team will discuss a donation that is designed to optimize tax benefits while potentially helping your clients achieve maximum charitable impact. Note that the charitable deduction amount varies by asset type.
4. Help clients decide on whether to give now, later, or both.
When creating or updating year-end giving plans, your clients may find it helpful to segment their charitable goals two ways: strategies for the current year and for the future, including extending their charitable legacy beyond their lifetime.
- Giving now: This allows donors to witness the impact of their philanthropy, providing a sense of fulfillment and strengthening their connection to the causes they support. Additionally, clients who itemize may be able to claim an immediate charitable deduction for their donation, potentially eliminate capital gains tax for donations of appreciated non-cash assets held more than one year, and give IRA assets tax-free through QCDs if they are at least age 70½.
- Giving later: Your clients may opt for more complex charitable giving strategies, like designating a charity as a beneficiary of their life insurance policy or retirement accounts, or establishing a charitable gift annuity or charitable trust. These approaches allow them to retain control over assets during their lifetime while ensuring that their charitable intentions are fulfilled upon their passing. They may also enjoy estate tax benefits and potential income tax savings for themselves or their beneficiaries in the future.
The choice about when to give depends on your clients’ charitable goals, financial goals, family needs, estate planning objectives, and desired charitable legacy. Tax benefits, either now or deferred, are also a key factor.
5. Prioritize donations based on your clients’ largest taxable events in 2023.
For clients who experience a large taxable event in 2023, contributing a portion of their assets can be an effective way to reduce their taxable income, offset or potentially eliminate capital gains taxes, and maximize support of their favorite charities and causes. Some scenarios where giving may reduce unexpected tax liabilities are:
- Unusual income year: Examples include bonus compensation and the sale of a home or business. In these scenarios, charitable giving can provide a valuable tax benefit. If your clients make tax-deductible donations to charities and itemize deductions, they may be able to reduce their taxable income or potentially offset the unexpected income taxes or capital gains taxes. This can be especially advantageous for clients who find themselves in a higher tax bracket due to increased earnings.
- Investment portfolio rebalancing: This is a powerful conversation for you to potentially initiate whenever you are rebalancing your clients' portfolios or discussing strategies for concentrated positions. Selling appreciated assets in a taxable account will trigger capital gains income. Help your clients understand that they can mitigate the potential tax liability by donating the long-term appreciated assets to a charity instead of selling the assets. This strategy allows them to potentially eliminate the capital gains tax and claim a charitable deduction for the fair market value of the donated assets.
- Retirement account withdrawals: Clients who are over age 59½ and have tax-deferred retirement accounts can use charitable donations and deductions, if they itemize, to help offset their tax liability on the amount they withdraw. In addition, if they are over age 70½ and have a traditional IRA, they can use QCDs, mentioned above, to satisfy all or part of their IRA Required Minimum Distribution (RMD).
What you can do next
December 31 is the donation deadline for 2023 tax deductions, so now is a great time to consider discussing these five actions with your clients to help them increase their charitable impact and reduce their taxable income.
Schwab Charitable also offers various resources to help you initiate charitable conversations and guide your clients throughout their philanthropic journey. For more information, visit schwabcharitable.org/advisors or request an information kit.
Caleb Lund, CAP®
Director of Charitable Strategies Group
Caleb Lund is Director of Charitable Strategies Group at Schwab Charitable, overseeing complex asset contributions. He is a California barred attorney and brings nearly a decade of fundraising and gift planning expertise to his role.
Hayden Adams, CFP®
Director of Tax Planning and Wealth Management
Schwab Center for Financial Research
Hayden Adams, CPA, CFP, is Director of Tax and Wealth Management for the Schwab Center for Financial Research. He provides analysis and insights on topics including income tax planning, tax-efficient investing, asset allocation, and retirement withdrawal strategies for a range of Schwab clients and advisors.
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