For those charitably inclined, giving to charity provides not only the satisfaction of doing good but also valuable tax savings when leveraged properly (if one itemizes deductions). On top of that, charity donation is one of the most flexible tax planning tools because taxpayers can generally control the timing, manner, and amount of their donations to meet their needs.

Cash Donations

Outright gifts of cash (which include donations made via check, credit card and payroll deduction) are the easiest to make. The substantiation requirements depend on the gift’s value:

• Gifts under $250 can be supported by a canceled check, credit card receipt or written communication from the charity.
• Gifts of $250 or more must be substantiated by the charity, with varying rules/requirements.

Deductions for cash gifts to public charities normally can’t exceed 60% of a taxpayer’s adjusted gross income (AGI). However, keep in mind, the AGI limit is only 30% for cash donations to nonoperating private foundations. Contributions exceeding the applicable AGI limit can be carried forward for up to five years.

Stock Donations

Appreciated publicly traded securities held more than one year are long-term capital gains property, which can make one of the best charitable gifts. Why? Generally, taxpayers can deduct the current fair market value and avoid any capital gains tax that would have been owed when the property was sold.

However, donations of long-term capital gains property are subject to tighter AGI limits than cash donations; the current limitations are 30% of AGI for gifts to public charities and 20% for gifts to nonoperating private foundations.

Generally, it is not recommended to donate stock that is worth less than the basis in it. Instead, consider selling the stock, which would then allow for the loss to be deducted and any cash proceeds could still be donated to the charity after the sale.

Also note, stocks held one year or less (as well as bonds held for less than a year, inventory, and property subject to depreciation recapture) are considered “ordinary- income property.” Generally, one may deduct only the lesser of fair market value or the tax basis for ordinary-income property.

Donating Digital Assets

Donating digital assets has emerged as a cutting-edge trend in philanthropy, as the rise of cryptocurrencies and other digital assets has captured the attention of both donors and non-profit organizations. These digital contributions represent a new avenue for supporting charitable causes, often providing significant tax advantages to the donor. As the popularity of digital currencies like Bitcoin, Ethereum, and others continues to grow, more charities are becoming equipped to accept these novel forms of donations.

Taxpayers must keep in mind the tax substantiation requirements when considering donating digital assets. Specifically, when it comes to tax substantiation requirements, donating digital assets is subject to IRS regulations, similar to other non-cash charitable contributions. The IRS treats cryptocurrencies as property for tax purposes, which means that the tax treatment of such donations can be complex and requires careful documentation:

• Donation Receipt: Just like with cash donations, one must obtain a written acknowledgment from the charity for donations of digital assets exceeding $250.
• Form 8283: For donations valued at more than $500, one must file Form 8283 (Noncash Charitable Contributions) with their tax return and maintain records of the fair market value.
• Qualified Appraisal: If the contribution exceeds $5,000, one will likely need a qualified appraisal to substantiate the value of the donated digital assets.

Donor-Advised Funds

When considering charitable giving, taxpayers should consider utilizing donor-advised funds (DAFs). DAFs are an increasingly popular vehicle for charitable giving that offers both flexibility and tax efficiency. Essentially, a DAF is a private fund administered by a third party, typically a public charity, which manages donations on behalf of individuals, families, or organizations. When one contributes to a DAF, he or she is immediately eligible to take a tax deduction for the full amount of the donation in the year the contribution is made, subject to IRS limitations based adjusted gross income.

Once the contribution is made, the money is placed into an account where it can be invested and grow tax-free. As the donor, the taxpayer has the ability to advise the fund on how to grant the money to qualified charities over time. This separation of the tax event (the donation) from the charitable giving allows for thoughtful, planned support to favorite charities and can be an integral part of overall tax planning strategy.

Benefits of DAFs include:

• Immediate Tax Deduction: Taxpayers receive an immediate tax benefit without needing to immediately decide on the charitable beneficiaries.
• Simplicity: The DAF handles all record-keeping, disbursements, and receipt
• Flexibility: Donors can advise grants to virtually any IRS-qualified public
• Potential for Growth: Contributions can be invested and potentially grow, tax-free, increasing the impact of the donation.

With these advantages, DAFs serve as a strategic option for those looking to manage their charitable giving effectively.

IRAs and Qualified Charitable Distribution (QCDs)

One other popular tool for those charitably inclined with IRAs is the utilization of QCDs or charitable giving from an IRA. Taxpayers aged 70 ½ or older are allowed to make direct contributions from their IRA to qualified charitable organizations, up to $100,000 per tax year. For a married couple, if both spouses are age 70½ or over and both have IRAs, each spouse can exclude up to $100,000 for a total of up to $200,000 per year. A charitable deduction cannot be claimed for these qualified charitable distributions. However, the benefit is that QCDs are not included in taxable income and can be used to satisfy an IRA owner’s required minimum distributions (RMDs). Note that the age for QCDs has not changed even though the age after which RMDs generally must begin is now higher.

A QCD might be tax-smart if one would not benefit from the charitable deduction, or a taxpayer faces AGI-based limits. To be a QCD, the transfer must be made by the IRA trustee directly to an eligible charity.

Concluding Thoughts

This memo has explored various charitable giving considerations, while not exhaustive by any means, highlighting both the philanthropic impact and potential tax benefits associated with each. One may prefer the straightforward approach of cash donations, the tax advantages of donating appreciated stock, or the long-term planning opportunities and flexibility associated with DAFs. Regardless, it is important to reach out to your Topel Forman advisor if you have any questions about any of these strategies, concepts, or would like more information about how to effectively tax plan in this area.