Nov. 27, 2023

A version of this article first appeared on EideBailly.com.

By Mandy Sutton 

The upcoming holiday not only brings the spirit of giving but also prompts investors to focus on tax reduction strategies. Charitable contributions and tax reduction can go hand in hand, presenting an opportunity to make a positive impact while optimizing your financial planning. Here are some strategies to consider for achieving both goals effectively.

Leverage tax-loss-harvesting for cash donations

The most common type of charitable giving is through a cash donation. One way to generate cash flow for a gift is through “tax-loss-harvesting.” For example, if you have securities that have declined in value from their original cost basis, you can sell those at a loss. Then, you can use that loss to offset capital gains from other investments — and up to $3,000 of ordinary income — while also claiming a charitable deduction for the total amount of cash donated.

Gift appreciated securities

Donating stocks, bonds or mutual funds that have gained value is becoming a popular donation method. Most organizations are equipped to handle these kinds of gifts. Since nonprofits don’t pay federal taxes, they can sell the donated investments without facing taxes on the profits. This is beneficial because if the donor sold the investments and then gave cash, the donor would have to pay taxes on the gains.

Typically, you can claim the fair market value of the donated investments as a deduction on your taxes, especially if you’ve held onto them for over a year — assuming you itemize your deductions.

Donate noncash or illiquid assets

The process of donating noncash or illiquid assets such as equity compensation awards, restricted stock, shares of a private company, real estate, art, collectibles and cryptocurrency can require more time and effort than donating cash or publicly traded securities. There are still advantages, especially if the assets have a low tax basis.

Issues to consider when donating these types of assets include:

• A qualified appraisal may be required to substantiate fair market value.
• Not all charities can handle such assets.
• Additional laws and regulations may apply such as Rule 144 resale restrictions, so it is essential to consult your legal, tax and financial professionals.

Concentrate multiyear giving

Concentrating several years’ worth of donations into a single year, then skipping contributions for several years, can allow you to make a significant charitable impact while maximizing the tax deduction for your contributions.

Charitable donation and Roth conversion

The potential benefits of the Roth IRA, including tax-free growth and tax-free withdrawals in retirement, make them a popular tool for tax-savvy retirement strategies. However, because of income limits, many cannot take advantage of a Roth IRA annual contribution. An alternative for those who can’t contribute is the conversion of eligible retirement accounts like a traditional IRA into a Roth. However, the conversion does generate a current taxable event.

Itemized charitable tax deductions can help offset a Roth IRA conversion’s tax cost, thus mitigating current and potential future taxes. Remember that you may take nontaxable withdrawals from a Roth IRA if you are at least 59 1/2 and the account has been held at least five years. Otherwise, earnings withdrawn may be subject to ordinary income tax and a 10 percent penalty.

Turn RMDs into QCDs

Tax law imposes RMD requirements because the funds were created with pre-tax dollars and Congress wants to ensure a minimum amount of distributions are taken — and income tax incurred. A QCD allows you to directly transfer funds from your retirement account to a qualified charity that also satisfies the RMD requirement for the year without any tax consequences — provided specific conditions are met.

Establish a donor-advised fund

A donor-advised fund is an account that allows you to make charitable contributions to a unique type of public charity — established to sponsor and act as administrator for donor-advised funds — and receive an immediate tax deduction. Then, in the future, you can direct contributions to other charities from the fund.

A donor-advised fund can be a desirable option if:

• You want to make a tax-deductible charitable contribution this year but still need some time to determine which charities you’d like to support with grant recommendations.
• You are considering a concentrated giving strategy with several years’ worth of contributions but would like to maintain annual gifting for specific charities.
• You are looking for a way to contribute complex noncash or illiquid assets to charities that are not capable of taking those types of donations.
• You have charitable inclinations and are looking to mitigate the tax implications of year‐end bonuses or stock option exercises.

Optimizing the impact of your charitable contributions

While charitable contributions must be received by Dec. 31 to qualify for tax-deductible charitable donations on 2023 tax returns, some noncash asset contributions may take several weeks or longer to facilitate, and a 2023 RMD/QCD request should be submitted a month or more before year-end to ensure the request is received by Dec. 31.

These effective strategies can help if you’re looking to maximize your charitable impact and reduce tax burdens. As year-end deadlines approach, now is the time to consult your legal, tax and financial professionals to discuss your goals. If you need help navigating any these strategies, Eide Bailly’s experienced advisers can help.