As we wind down 2022 and begin planning for 2023, it’s a great time to consider your 2022 individual income taxes and explore ways to position yourself favorably for those taxes. There are still a few days left to make last-minute charitable gifts before December 31, 2022. While certain benefits like the special provision included in the Coronavirus Aid Relief and Economic Security (‘CARES’) Act and subsequently extended by the Taxpayer Certainty Disaster Relief Act of 2020 that allowed anyone (even those who take the standard deduction) to deduct up to $300 for donations to a qualifying charity on their federal income tax return ($600 for married couples) expired at the end of 2021, it’s still possible to take advantage of other favorable provisions designed to lower your overall tax bill if you are willing to itemize your deductions. Of course, this means that the taxpayer needs to do a little more work and “run the numbers” to determine whether itemizing makes sense for them.
Taxpayers who make donations to a supporting organization, Private Foundation, Charitable Remainder Trust (‘CRT’), or a Donor Advised Fund (‘DAF’) could take these charitable deductions as itemized deductions as noted above. A supporting organization is a charity that accomplishes its exempt purposes by supporting other exempt organizations, usually public charities. A Private Foundation is a trust or corporation dedicated to achieving a charitable mission created by a single individual, family, or corporation. A CRT is a trust in which the donor keeps an annuity or unitrust payment stream for a term of years or life and gives the remainder interest to a charity. The DAF is an account maintained by a charity that allows the donor to advise on how to distribute or invest amounts contributed by the donor held in the fund.
Of the above charitable vehicles, DAFs have continued to grow in popularity in recent years. According to the National Philanthropic Trust, the 2022 DAF Report found DAF donors granted at historic levels with grants to qualified charities of over $45 billion in 2021. That amount represented a 28.2% increase in donations from 2020, which was higher by 28.3% than in 2019. DAF grant payout rate was 27.3%, which exceeded the ten-year average payout rate of 22.2% demonstrating the popularity and power of the DAF as a charitable vehicle. Contributions to DAFs give an immediate income tax deduction to the donor while creating a reservoir of assets for distribution to charities in the future. In addition, DAFs provide an opportunity for donors to invest contributed funds and make suggestions regarding which charities should receive the distributions. Donors may change their recommendations regarding charitable distributions allowing great flexibility coupled with immediate benefits. Donors may combine DAFs with other strategies to produce even better results. For example, if a donor gave highly appreciated public stock to a DAF, the donor would receive an income tax deduction for the full value of the appreciated stock without ever paying tax on the gains. DAFs complement any charitable giving strategy already in effect and provide a great opportunity for those new to charitable giving to discover the benefits it provides.
Individuals making any of these gifts need to itemize their deductions to receive a charitable income tax deduction. The foregoing charitable opportunities present just a few of the myriad ways in which a taxpayer can remove the assets, as well as the appreciation on those assets, from their taxable estate and obtain an income tax charitable deduction. Year-end presents a wonderful time to consider these and other Estate Planning issues. Charitable contributions offer an excellent opportunity to give by doing good for the community and to receive an income tax charitable deduction for your efforts. Several communities are still reeling from the pandemic, have suffered high levels of inflation, and need our help now more than ever. A qualified Estate Planning Attorney can help you explore your charitable opportunities in more detail and discuss other year-end estate planning opportunities.
Tereina Stidd, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128