As the calendar year-end approaches, the “Giving Season” is in full swing. Many taxpayers considering charitable gifts are concerned about gifting choices in an environment of rising interest rates and relatively high inflation. In these challenging times, it pays to be smart about your charitable gifting. Here are three easy tips to help you: [1] be creative about the nature of your gifts, [2] be careful not to lose your charitable tax deduction, and [3] be mindful of the timing of your gifts.
Be Creative With The Nature and Timing of Your Gifts. Making cash gifts from discretionary income is tempting because it is easy. However, in an era of inflation, these cash gifts are often the least tax advantaged gifting strategy because inflation reduces purchasing power and decreases discretionary income. Giving from assets such as stock, rather than from income needed to cover daily expenses, can reduce the impact of inflation on charitable gifts. Donors should consider making gifts of appreciated stock (which carries a dual tax benefit of allowing a charitable deduction and avoiding capital gains tax on the appreciation), real estate, closely-held business interests, or Qualified Charitable Distributions from IRA accounts (for donors over age 70 ½, QCD’s are often the first and best gifting strategy).
Generally, a taxpayer can claim a deduction on their income tax return for any charitable donation to a qualified organization (e.g. nonprofit religious, charitable, or educational groups), but only if they itemize their deductions. Typically, a taxpayer will only elect to itemize deductions if the total deductions exceed the standard deduction, which ranges from $12,950 to $25,900 for the 2022 tax year depending on filing status.
For taxpayers whose itemized deductions do not exceed the standard deduction in a given tax year, they should consider a strategy known as “bunching.” Bunching allows the taxpayer to group the charitable gifts they intend to make over a future period into a single year so the charitable deduction is large in the year of gifting and zero in the years no gifts are made. For example, by making a gift on Jan. 1 and Dec. 31 of a single year, a taxpayer can, in effect, “stack” their deductions into a single year while spreading the impact of their gift-giving into the following year.
Be Careful Not to Lose Your Deduction. The rules for substantiating the terms of a charitable contribution under the Internal Revenue Code can be arcane and complex. Even if you can prove that you made a contribution to a charity, charitable deductions can be denied if you do not have complete, accurate, and timely paperwork. The requirements depend on the type and amount of the gift and, not surprisingly, are more stringent for larger gifts. For example, for a cash gift of $250 or less, you must have a “bank record” (such as a canceled check, bank, or credit card statement) with the name of the charity and the date and amount of the gift. In contrast, for a single gift greater than $250 (cash or property), you must have a Contemporaneous Written Acknowledgement (CWA) of the gift from the charity in hand before filing the tax return, and the CWA must include all of the information required by the IRS (amount of cash and description of other property, whether the charity provided any goods or services in consideration for the gift, and a description and good faith estimate of the value of any such goods or services). If you received anything of value in return for the contribution, you can only deduct the difference between the value of the contribution and the value of what you received. The charity must provide you with written disclosure of the value of the goods or services you received (such as the price of the meal you ate at a charity dinner event). Larger gifts of property are more complicated and subject to additional filing requirements. In addition, the value of the property that can be deducted (fair market value or less) can vary depending on the nature of the donee organization. Finally, longstanding limits on the allowable charitable deduction as a percentage of your gross adjusted income may apply. Two recent cases (Albrecht v. Commissioner and Keefer v. United States) decided against the taxpayers are powerful reminders that this issue remains on the radar of the IRS, and failure to strictly comply with the substantiation rules imposed under the Internal Revenue Code can result in a failed deduction for the taxpayer.
Be Mindful of Timing. Finally, do not wait until December 31 to make your gifts. Banks and brokers are often swamped with year-end client requests for transfers. In addition, setting up a new account for gifting, or making noncash gifts, often requires additional paperwork and multiple steps that could delay the effective date of your gift until 2023, making it too late to qualify for a 2022 charitable deduction.
Given the technicalities and strategy considerations involved with making charitable gifts and maximizing your charitable deduction, its best to consult your professional tax advisor with any questions.
Maribeth Younger is attorney with Williams Weese Pepple & Ferguson’s Private Client group. If you have questions, please contact Maribeth Younger or other members of the firm’s Tax and Private Client groups.
