2022 Charitable Giving Strategies

Gretchen Miller, MBA, CFP®, Senior Client Experience Manager, November 2022

<p>2022 Charitable Giving Strategies</p>

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One of the most meaningful aspects of accumulating wealth is the ability to give back in significant, influential ways. Families and individuals donate for a whole host of reasons and taking advantage of tax breaks is low on the list of motivations. Still, tax benefits are an important secondary consideration when giving, one that requires a closer look. Charitable giving strategies should be evaluated by taking into consideration your personal goals and circumstances and in consultation with your advisor and your tax advisor.

Since 1917, individual taxpayers who itemized have been able to receive a tax break on their charitable gifts. However, the enactment of the Tax Cuts and Jobs Act in 2017 has reduced the federal tax benefit for many households. Beginning in 2018, the standard deduction nearly doubled. As a result, far fewer taxpayers are itemizing and receiving an actual tax break for their charitable gifts.

Understanding the factors impacting tax benefits

For itemizing taxpayers, the tax benefits of charitable giving will depend on factors that include:

  • The type of asset contributed
    ( e.g., cash, long-term capital gain property, short-term property, tangible personal property, self-created property).
  • The basis and fair market value of the assets donated.
  • The type of charity to which the gift is donated – a public charity or a private foundation.
  • The income level and tax bracket of the taxpayer.
    As a rule, an individual cannot offset their entire income in a year with a sufficiently large charitable gift. The amount you can deduct for charitable contributions is generally limited to no more than 60% of your adjusted gross income (AGI). Your deduction may be further limited to 50%, 30% or 20% of your AGI limit depending on the type of property you give and the type of organization you give it to. For large charitable gifts, amounts in excess of those limits can be carried forward for five more years.

Planned gifts can make it possible for you to give more than would otherwise be the case, while providing important tax advantages to you. There are a variety of planned giving options.

Cash contributions: Above-line deduction
Prior law allowed individuals who did not itemize their deductions the ability to deduct up to $300 ($600 married filing jointly) of cash contributions made to a public charity or certain foundations. Donations to non-operating private foundations, supporting organizations, or donor-advised funds did not qualify for this above-line deduction amount. Absent a year-end extender law getting passed, this above line deduction will not be available for 2022.

Gift Appreciated Securities

Some of the most tax-efficient assets to give to charity are marketable securities held 12 months or longer that have appreciated with unrealized capital gains. By donating these directly to the charity, you receive a deduction based on the fair market value of the property, and neither you nor the charity pays a tax on the capital gains if the security is subsequently sold by the charity.

Donating highly appreciated stock may enable you to automatically increase your gift and tax deduction and save on capital gains taxes. This is how it works: When you donate appreciated assets to charity, you generally take a tax deduction for the full fair market value of the asset rather than your basis. As a result, the value of your gift and the amount of your tax deduction increase, and you eliminate your capital gains tax exposure. When the charity later sells the stock, it pays no tax on the gain.

As an example, assume you are debating whether to donate $15,000 of cash, sell $15,000 in stock and donate the cash proceeds, or donate $15,000 worth of stock outright to the charity. What are the net tax savings of the different strategies?

$15,000 Fair Market Value of Stock, $5,000 Cost Basis, Bought 5 Years Ago Donate $15,000 Stock Outright  Donate $15,000 Cash Sell $15,000 Stock and Donate Cash Proceeds
Charitable donation $15,000 $15,000 $15,000
Ordinary income tax savings (assume 37% rate) $ 5,550 $ 5,550 $ 5,550
Capital gains tax paid (assumes 20% tax on $10,000 gain) $ 2,000 saved NA $ 2,000 paid
Net tax savings $ 7,550 $ 5,550 $ 3,550

If your stock is worth less than you paid for it, it is better to sell the stock first, and then donate the cash so that you can take the capital tax loss against current or future capital gains.

To maximize your charitable giving strategy, you must have enough deductions to make itemizing worthwhile. You need to have at least $13,000 in deductions for single filers and $26,000 for married couples filing jointly to make it worth it. However, even if you take the standard deduction this year and do not itemize your charitable deduction, you still benefit by eliminating the capital gains tax. This is a win for your favorite charity and a win for you.

What is Fair Market Value?

For publicly trading stock, that is the average of the high and low market price on the transfer date. Private company stock requires an appraisal unless the estimated value is less than $10,000.

Contribute to a Donor-Advised Fund

A donor-advised fund (DAF) is a contractual arrangement that a donor enters into with a sponsoring charity to establish an account to benefit the donor’s chosen charities. If you are charitably inclined, you might consider a contribution to a DAF to offset unexpectedly high earnings and year-end bonuses. The basic concept of a DAF is straightforward:

  • You contribute to the fund and subsequently recommend specific grants to favorite charities when you are ready.
  • Keep in mind that your recommendations are subject to final approval and release of the funds by the administrating organization.
  • You can claim a tax deduction for the year in which you put assets into a DAF; the amount and timing of any actual grant has no bearing on the tax deduction.
  • DAFs are typically invested and grow tax-free. Donor-advised funds also enhance giving flexibility. You do not have to identify nonprofit beneficiaries when you make tax-deductible contributions to your donor-advised fund, and you can distribute your contributions and investment gains to recipients over as long a period as you wish.

Private foundations also use DAFs to fulfill their 5% mandatory annual distribution requirement when the foundation is not ready to make a final decision about where to make their grants at the end of the year.

Legislative alert

On June 9, 2021, the Accelerating Charitable Efforts (ACE) Act was introduced. If enacted, the legislation would heighten transparency and expedite the pace of resources flowing from donor advised funds (DAFs) and private foundations to working charities.

The DAF changes would attempt to address a timing mismatch perceived between the income tax deduction and the production of charitable good and services. As an example, contributions to a nonqualified DAF would not allow a charitable deduction until the sponsoring organization sells the donated property, cash contributions or proceeds from the sale of donated property are distributed to charities, and the amount of the deduction matches that of the distribution.

If enacted, the proposed legislation would introduce several changes that would also affect private foundations. This includes changes relating to calculating compliance with the 5% annual payout requirement and calculating excise tax obligations among other details.

We will continue to monitor legislative developments.

Offsetting the Tax Costs of a Roth IRA Conversion

A charitable gift could save you taxes on a Roth conversion. Roth IRAs offer two important tax advantages: (1) Unlike traditional IRAs and employer sponsored plans distributions, qualified Roth IRA distributions are tax free; and (2) Unlike traditional IRAs and employer sponsored plans, Roth IRAs are not subject to required minimum distribution (RMD) rules that must begin at age 72. A change in the tax law and political developments could result in higher future taxes. If you believe your current tax rate is lower than it will be in the years you will be taking distributions from your retirement assets, a Roth conversion can be viewed as insurance against future tax rate increases that would otherwise apply. As a result, more retirement dollars will be available as a tax-free source of income and available to pass to beneficiaries. The bad news is the amount you convert from a traditional IRA to a Roth IRA is taxed as ordinary income in the year of conversion and may push you into a higher marginal federal income tax bracket. Keep in mind that not all states tax distributions from retirement accounts (check with your tax preparer to see if state income taxes will apply to your Roth conversion). If you are charitably inclined and plan to do a Roth conversion before the end of the year, a large itemized charitable tax deduction can help offset the taxes due to the Roth conversion.

Make Qualified Charitable Distributions

A charitable rollover, also known as a qualified charitable distribution (QCD), can be an effective vehicle for charitable giving. QCDs enable an individual over age 70½ to make tax-advantaged charitable donations of up to $100,000 per year from their IRAs during their lifetime if the distribution is made directly to a charity. QCDs are only allowed from traditional IRAs; they are not allowed from employer sponsored retirement plans. QCDs are not included in adjusted gross income and for those over age 72, the distribution will satisfy or help satisfy your required minimum distribution from an IRA. Any potential income taxes owed on these distributions are eliminated which makes QCDs beneficial for standard deduction filers.

If you have IRAs with nondeductible contributions or multiple IRAs, there are special rules in determining what portion of deductible and nondeductible contributions has been distributed as a QCD and what portion of the remaining IRA is treated as including nondeductible contributions.

Be aware some states may not follow federal tax law and will not allow an exclusion of the QCD from state taxable income. The IRA owner should consult with their tax preparer regarding state taxability of QCDs.

Utilize Split-Interest Charitable Trusts

Split-interest trusts are popular due to their dual beneficial interests: They can benefit a qualified charity and a noncharitable beneficiary. For individuals with Federal taxable estates (assets exceeding $12.06 million per individual, $24.12 million per married couple), low interest rates and lower asset values create a unique opportunity to plan with charitable lead annuity trusts (CLATs). A CLAT is an irrevocable trust that distributes a predetermined amount to a charitable beneficiary for a term of years; the amount remaining at the end of the term is distributed to noncharitable beneficiaries, such as your children. You receive a current charitable income tax deduction to offset the taxable transfer to your beneficiaries, which is sensitive to the IRS interest rate (Section 7520 rate). The lower the interest rate (4.0% in October 2022), the higher the deduction.

The greater the difference between the projected average rate of return of CLAT assets over the trust term and the Section 7520 rate, the greater the potential tax-free wealth transfer to the younger generation. CLTs have been particularly useful for assets that generate substantial income each year that is not needed and where the donor wants to eventually pass the asset to heirs.

A charitable remainder trust (CRT) provides noncharitable beneficiaries with exclusive rights to distributions until their interests terminate; at that time, charitable beneficiaries receive the assets left over in the trust. CRTs have been particularly useful for investors who want to diversify highly appreciated assets but have been concerned about incurring the capital gains tax. The deferral or avoidance of capital gains tax has been a popular feature for funding CRTs with appreciated assets.

Individuals with large retirement accounts should consider naming a CRT as beneficiary, particularly in light of a recent law (The SECURE Act, 2019) that requires retirement account benefits to be distributed within 10 years after the year of the retirement account owner’s death. In general, a CRT provides a current income tax charitable deduction and a stream of income to noncharitable beneficiaries, such as your children, for a term of no more than 20 years or the life of one or more of the noncharitable beneficiaries. By using a longer payout term, a CRT can potentially avoid subjecting a beneficiary to a higher tax bracket and the 3.8% surtax on net investment income. When the trust term ends, the remainder passes to a charity or charities.

Gift Planning Summary of Outright Charitable Contributions – 2022

Income Tax Deduction Capital Gain Considerations Method of Transfer Special Considerations
Cash Amount of cash, up to 60% of donors’ AGI for gifts to public charities (50% charities); up to 30% of AGI for gifts to private foundations. Five-year carryover allowed for excess deductions. None Checks or other cash equivalents including credit card charges, electronic transfer, and physical delivery of cash. Carried-over deductions from cash gifts are considered before carryovers of property gifts.
Current market value if long-term transferred to a 50% charity, up to 30% AGI or long-term transferred to a 30% charity, up to 20% of AGI. Limited to cost basis if short-term gain up to 60% of AGI (30% for private foundations). Five-year carryover for excess. No gain reportable when donor gives appreciated securities. Transfer can be made to charity’s account or be delivered to charity’s agent in negotiable form. Donors or appreciated securities can qualify for the 50% AGI ceiling by electing to reduce their contribution deductions by 100% of the gain. Strategy could be effective where long-term capital gain is insubstantial.
Donor Advised
Funds (DAF)
Donor receives charitable deduction when contributions are made to a DAF. No additional deduction allowed when DAF makes transfer to a recipient charity. No gain reportable if donor gives appreciated assets to a DAF. Account owner can make recommendations of gifts to individual charities, but DAF retains ownership and control over distributions. Good if donor does not have individual charities identified yet, but still wants current year tax deduction. Currently no minimum annual distribution required by a DAF account.
Real Property Current value of appreciated real estate held long-term, less any indebtedness transferred to a 50% charity, up to 30% of AGI with 5-year carryover for excess deduction. Transfer to 30% charity is deductible at cost basis only, up to 20% of AGI with five-year carryover. No gain reportable by donor. Transfer of title of contributed realty is generally made by quit-claim deed. Verify charity’s policy on accepting real estate gifts.
Closely Held
Current value of appreciated closely held securities if long-term transferred to a 50% charity, up to 30% AGI with five-year carryover of excess deduction. Transfer to 30% charity deductible at cost basis only, up to 20% of AGI. No gain reportable by donor. Delivery of securities in negotiable form to charity or agent by transfer of certificate into charity’s name. Gifts of closely held securities are often negotiated with anticipation of corporate redemption of charity’s stock. Gifts may also be attractive where sale of corporation is anticipated. Be aware of pre-arranged sales that could cause the gain to be recognized by donor.
Life Insurance FMV of policy (interpolated terminal reserve value) or donor’s costs basis, whichever is less, subject to 60% of AGI ceiling (30% for private foundations. Policy loans reduce deductions. No deduction for term policies. Ordinary income property. Generally, no recognition of gain unless policy is subject to a loan. Ownership of policy is transferred to charity by an endorsement by the donor on forms supplied by the insurance company and accompanied by delivery of the insurance policy. If the donor continues to pay the policy premium, donor receives a charitable income tax deduction.
from IRAs (QCDs)
No deduction. But, qualified donors (IRA owners age 70 ½ and older) do not include the distribution (up to $100,000) in income. Also counts toward RMD requirement. None IRA owner can request trustee or custodian of account to make a QCD to a qualified charity (does not include a DAF, supporting organization, CRT or CGA).  Currently, employer sponsored retirement plans are ineligible for QCDs.


If you are considering making gifts to your favorite charities this year, consult your Key Private Bank Advisor and your legal or tax advisor to determine which strategy could help maximize the benefit for you, your family, and your chosen charitable causes.

For more information, please contact your advisor.

Gretchen Miller, MBA, CFP<sup>®</sup> Biopic

About Gretchen Miller, MBA, CFP®

As a Senior Client Experience Manager for Key Private Bank, Gretchen Miller focuses on ensuring her clients’ wealth management plans are carried through to meet their unique financial objectives and grow and preserve wealth.

Partnering closely with the Relationship Manager, Gretchen coordinates the implementation of wealth management strategies with the relationship team and ensures clients have the tools and information to keep track of their financial situation and make informed decisions. She also synchronizes regular communications and updates with the team, and proactively delivers the latest insights and advice to benefit clients’ particular situations.

Gretchen has more than 25 years of experience in financial services and is well qualified to help clients implement strategies to achieve their goals. Most recently, prior to joining Key, Gretchen served as Director of Advanced Planning for Prudential Financial where she was a subject matter expert on financial and estate planning, and on retirement topics such as Social Security and Medicare.

Gretchen earned a Bachelor’s Degree in Management from Springfield College and an MBA from the University of Phoenix. Gretchen also obtained her certification as a Certified Financial Planner®. She is a member of the Financial Planning Association, the Investments & Wealth Institute and the Key Wealth Institute.

The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities including Key Private Bank, KeyBank Institutional Advisors, and Key Investment Services.

Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

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