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Year-end strategies for charitable giving

Key takeaways

  • While charitable donations by check or cash are the most common, giving long-term appreciated securities may have attractive tax benefits.
  • Opening a donor-advised fund (DAF) can be a particularly effective way to give.
  • A qualified charitable distribution (QCD) from an IRA can be used to satisfy your required minimum distribution (RMD).
  • Before undertaking any strategy, consult your legal, tax, or financial professional.

Nonprofits do invaluable work domestically and around the world, supporting communities affected by natural disasters, war, and economic instability. And there are tax-smart strategies to help the causes you care about that also make sense for your finances, even through ups and downs in the market.

Before you reach for your wallet or checkbook, consider these 8 strategies to help you make more of a difference.

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1. Consider giving long-term appreciated securities, rather than cash

Donations made by cash or check are, by far, the most common methods of charitable giving. However, contributing stocks, bonds, or mutual funds that have appreciated over time has become increasingly popular in recent years, and for good reason.

Most publicly traded securities can be donated to a public charity. If the security has been held for more than one year when the donation is made, the donor can claim the fair market value as an itemized deduction on their federal income tax return (assuming they itemize their deductions). The amount deducted in a single year can be up to 30% of the donor’s adjusted gross income (AGI). Other types of securities, such as restricted or privately traded securities, may also be deductible, but additional requirements and limitations may apply. No capital gains taxes are owed when the securities are donated, not sold, so you can have the opportunity to save on taxes whether you itemize or not.

In addition, because you are donating the stock, wash-sale rules don’t apply, so you can purchase new shares of the same security at a higher cost basis, potentially minimizing future tax liability if sold at a later date.

Often, people who receive compensation in the form of their employer's stock can carry a sizable exposure to that company. Gifting shares of company stock can help satisfy your philanthropic goals as well as the common goal to diversify your portfolio, all while managing the impact on your capital gains tax. To fully maximize your impact this year, check if your employer offers any matching opportunities for charitable contributions.

Lastly, people who receive mutual fund distributions at year-end may be surprised at the significant capital gains they may be facing, in addition to ordinary income taxed from part of the distribution. A potential strategy is to donate these mutual funds before the ex-dividend date to reduce the number of shares in the fund, netting a smaller taxable distribution on the pay date, in addition to qualifying for an income tax deduction, if you plan to itemize.

2. Check your portfolio for non-publicly traded assets

Donors may also contribute complex and illiquid assets—such as private company stock, restricted stock, real estate, alternative investments, cryptocurrency, or other long-term appreciated property—directly to charity. The process for making this type of donation requires more time and effort than donating cash or publicly traded securities, but it has distinct potential advantages. These types of assets often have a relatively low cost basis. In fact, for entrepreneurs who have founded their own companies, the cost basis of their private C-corp or S-corp stock may effectively be zero.

Contributing non-publicly traded assets to charity, however, involves additional laws and regulations, so investors should first consult their legal, tax, or financial professional. Also, not all charities have the administrative resources to accept and liquidate such assets. (The same applies to stock donations.) This is where you might consider a donor-advised fund (DAF) program: DAFs are able to accept these assets and can work with investors and their financial professionals, providing them with guidance throughout the process.

3. Optimize giving with a donor-advised fund (DAF)

A DAF is a giving vehicle sponsored by a public charity. It allows donors to make an irrevocable charitable contribution to the public charity, be eligible to receive an immediate tax deduction, and then recommend grants from the fund to a variety of other charities over time. This approach can help streamline your giving, including tax recordkeeping, in one convenient location.

Donors can contribute to the charity as frequently as they like and then recommend multiple grants to their favorite charities whenever it makes sense for them. There are a number of public charities, including Fidelity Charitable®, that sponsor DAFs. The Fidelity Charitable® Giving Account® has no minimum initial contribution requirement and one of the lowest annual fees of any DAF. Once opened and funded, you can then recommend grants to other eligible charities—generally speaking, IRS‐qualified 501(c)(3) public charities—from your DAF.

Opening a DAF allows you to make a gift and qualify for a charitable deduction immediately without needing to decide, until you're ready, on the charities to support with grant recommendations. It can also be a way for charitably inclined individuals to offset a year with unexpectedly high earnings, or to address the tax implications of year‐end bonuses or stock option exercises, or to offset taxable income generated from rebalancing your portfolio. Once donated to the DAF, assets can be invested and earn returns without being taxed. By donating directly to a DAF, you can potentially give more to charities than if you were to liquidate assets and then make a donation. (For more on DAFs, read Viewpoints on Strategic giving: Think beyond cash)

You can incorporate your DAF into estate planning by making a bequest in your will to the DAF sponsor or by making the sponsor a beneficiary of a retirement plan, life insurance policy, or charitable trust. By leaving instructions with the DAF sponsor, you can support multiple charities with one bequest.

4. Consider an offset strategy with rebalancing

Periodic portfolio rebalancing can help keep your investments aligned with your risk tolerance and to your overall financial goals—but the tax consequences can be extensive. Rebalancing often means selling appreciated securities and the capital gains realized could lead to a substantial tax bill. By aligning your charitable wishes and financial planning decisions, you can consider donating a portion of the securities you would otherwise sell to help reduce the taxable consequences of rebalancing while making a significant difference for your favorite causes.

5. Consider a bunching strategy from year to year

To make the most of the potential tax deductions, consider "bunching." That means concentrating deductions in a single year, then skipping one or even several years. This strategy can work well when your total itemized deductions for a single year fall below the standard deduction. Charitable contributions for several years made at once may allow the total of itemized deductions to exceed the standard deduction, making it possible to obtain a tax deduction for at least part of the charitable contributions. The catch is that this strategy requires having the financial capacity to pack more than a year's worth of your contributions into a single year.

This can also be an impactful strategy for donors experiencing a high-income year or preparing for retirement, since you can maximize your tax benefits when you need it while creating a ready reserve to support charities over time.

6. Consider using a charitable donation to offset the tax costs of converting a traditional IRA to a Roth IRA

One way to potentially reduce future taxes is to convert a portion of your traditional IRA assets into a Roth IRA. The essential difference between traditional retirement savings vehicles (whether they're IRAs or workplace plans) and the Roth versions is that with traditional IRAs, contributions are usually tax-deductible the year they are made and can grow tax-deferred within the account. The contributions and earnings are then taxed upon withdrawal.

Roth IRA contributions are not tax-deductible. You can make withdrawals from your Roth IRA anytime, tax- and penalty-free, if you meet certain requirements: These are called "qualified withdrawals." Be aware, however, that you may have to pay taxes and/or penalties on nonqualified withdrawals from a Roth IRA that go beyond your accumulated contributions, and that includes withdrawals of converted balances.1

Roth conversions may make sense if you believe your current tax rate is lower than it will be in the years you’ll make withdrawals; however, there are many other factors to consider.

To help offset the tax cost of a Roth IRA conversion, consider making a charitable contribution. Donating long-term appreciated securities to charity may be more tax-efficient than selling the security and donating the after-tax cash proceeds.

7. Over 70½? Consider a qualified charitable distribution (QCD) from an IRA

If you are at least age 70½, have an IRA, and plan to donate to charity this year, another consideration may be to make a QCD from your IRA. This action can satisfy charitable goals and allows funds to be withdrawn from an IRA without any tax consequences. If you are over age 73,2 a QCD can also be used to satisfy your required minimum distribution (RMD)—up to $100,000 per individual in 2023. The QCD contribution limit increases to $105,000 in 2024.

QCDs may be particularly appealing if you have few other itemized deductions or if you are already close to your charitable deduction limitations. Because the tax-free QCD is never reported as income or as a deduction, it is not counted against the charitable limits and does not require itemization to be effective. Generally, people who itemize can donate up to 30% of their adjusted gross income (AGI) in appreciated assets held longer than one year, and up to 60% of AGI in cash and property.3

So if you are subject to an RMD, don’t need the funds, and would face increased income tax liabilities if you took the entire RMD, a QCD can yield both a good tax and philanthropic result.

Tip: DAF sponsors such as Fidelity Charitable are not eligible recipients for QCDs, even though they are public charities. Seek professional advice about QCDs, and visit Fidelity's Learning Center for more on QCDs.

The Secure Act 2.0 allows for a one-time QCD election of up to $53,000 per individual in 2024 to fund a split-interest entity, including a Charitable Remainder Trust, Charitable Remainder Annuity Trust, or Charitable Gift Annuity.

8. Check employer benefits to maximize charitable contributions

With 86% of workers saying it’s important to work for an employer whose values align with their own, more employers are implementing workplace giving benefits to boost engagement at work and give workers a deeper sense of connection. Many companies already offer workplace giving benefits where they’ll match tax-advantaged charitable contributions to nonprofits, or organize volunteer days for causes that match their employees’ interests.

Before undertaking any of these giving strategies, you should consult your legal, tax, or financial professional. Each of the strategies, properly employed, represents a tax‐advantaged way for you to give more to your favorite charities.

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More to explore

Recently enacted legislation made a number of changes to the rules regarding defined contribution, defined benefit, and/or individual retirement plans and 529 plans. Information herein may refer to or be based on certain rules in effect prior to this legislation and current rules may differ. As always, before making any decisions about your retirement planning or withdrawals, you should consult with your personal tax advisor.

1. A distribution from a Roth IRA is tax free and penalty free provided that the five‐year aging requirement has been satisfied and at least one of the following conditions is met: you reach age 59½, die, become disabled, or make a qualified first‐time home purchase. The latter is subject to a $10,000 lifetime limit.

The CARES Act increases the charitable deduction limitation for cash contributions to qualified charities from 60% to 100% of AGI for donors who itemize. The provision explicitly excludes increased deductions for contributions to private foundations as described in 509(a)(3) and to establish or maintain a donor advised fund as defined in section 4966(d)(2). This change goes into effect for the tax year beginning January 1, 2020. 2. The change in the RMD age requirement from 72 to 73 only applies only applies to individuals who turn 73 on or after January 1, 2023. Please consult with your tax professional regarding the impact of this change on future RMDs. 3. Charitable contributions of appreciated property held for more than one year are usually deductible at fair market value. Deductions for appreciated property held for one year or less are usually limited to cost basis. For contributions to public charities, deductions for cash donations are usually limited to 60% of adjusted gross income (AGI), while donations of securities with long‐term appreciation are usually limited to 30% of AGI. Additional limitations and reductions may apply, especially to taxpayers in higher tax brackets. Excess charitable deductions can generally be carried forward for up to five years. Consult a tax professional regarding your specific tax situation.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

For a distribution to be considered qualified, the 5-year aging requirement has to be satisfied, and you must be age 59½ or older or meet one of several exemptions (disability, qualified first-time home purchase, or death among them).

Fidelity Charitable is the brand name for Fidelity Investments® Charitable Gift Fund, an independent public charity with a donor-advised fund program. Various Fidelity companies provide services to Fidelity Charitable. The Fidelity Charitable name and logo, and Fidelity are registered service marks of FMR LLC, used by Fidelity Charitable under license.

Fidelity Charitable is the brand name for the Fidelity Investments® Charitable Gift Fund, an independent public charity with a donor-advised fund program. Various Fidelity companies provide services to Fidelity Charitable. The Fidelity Charitable name and logo, and Fidelity are registered service marks of FMR LLC, used by Fidelity Charitable under license. Giving Account is a registered service mark of the Trustees of Fidelity Charitable.

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