With year-end approaching, it is the ideal time to consider charitable gifting and, even more importantly, how to gift tax efficiently. Physicians frequently find themselves in the highest tax bracket both during their working careers as well as in retirement, thereby making the consideration of various tax-efficient charitable giving strategies critically important. Some strategies are more applicable in retirement or only available to those over age 70 ½. Other strategies consider whether the physician takes the standard deduction or itemizes. With a 2023 standard deduction of $27,700 for married couples filing jointly (with an additional $1,500 each if 65 or older) and $13,850 for single taxpayers and married individuals filing separately (with an additional $1,850 if 65 or older and not a surviving spouse), some physicians may not itemize and, therefore, need to more strategically find ways to donate and still receive a tax benefit. There are various factors to consider with a few opportunities outlined below that can be used as a guide and talking points with your CPA and wealth advisor.
Donor-Advised Fund (DAF) & Charitable Bunching
DAFs can be beneficial charitable vehicles for physicians at any age or point in their careers. DAFs are accounts established with financial institutions or public charities and when contributions are made to the DAF, the physician receives a tax deduction for that year, subject to the overall adjusted gross income (AGI) limitations for charitable contribution deductions. The individual then retains advisory privileges with respect to the distribution of funds to qualifying charities. These gifts can be made in the same year or over many years. Contributions to the DAF can be made with many types of assets, the most common being cash or appreciated securities. Using a DAF can simplify the annual tracking and reporting of your charitable gifting. See the benefit of using appreciated securities below.
The use of DAFs is particularly beneficial in this current landscape of relatively high standard deduction amounts. With a DAF, the physician can aggregate contributions in one year and itemize in the year of DAF funding. The physician can then take the standard deduction in the following years while annual amounts are distributed directly from the fund to the qualifying charities.
Strategy: Annual gifting. If you typically gift $10,000 per year to charity, you may not be able to fully deduct this charitable gift on your tax return if you are using the standard deduction. However, if you give $30,000 in one year into the DAF, then you may be able to mostly or fully deduct the gift in that calendar year. Then, the DAF can distribute funds to preferred charities over the next three years. This strategy leaves the charity in the same position it would have been had you gifted directly over the three years.
Strategy: High taxable income year. If you experience higher taxable income in a given year due to higher earnings or large retirement distributions or have a significant capital gain due to selling a business or real estate property, you may want to consider making a much larger charitable contribution to your DAF in the same tax year to help offset the increase in taxable income. Then, the DAF can distribute funds to preferred charities in future years.
Appreciated Securities
Physicians with appreciated securities held more than one year should consider donations of those assets directly to a qualified charity or DAF. Contributions of that long-term capital gain property to a qualifying organization are usually deducted at fair market value. This strategy can be advantageous as the donor does not have to recognize the capital gain on the disposition while being able to deduct the fair market value on the qualifying asset. Donors do need to keep in mind that this deduction is generally subject to a lower limitation based on AGI, so it is important to estimate anticipated taxable income and plan accordingly. Any unused deduction due to an AGI limitation may be carried forward up to five years.
Strategy: If your annual charitable giving isn’t enough to put you over the itemized deduction threshold, you can still gift appreciated securities and not have to pay taxes on the capital gains. This can help you reduce future tax consequences.
Strategy: Many physicians do not want to use their appreciated securities in their taxable investment account because those are earmarked for retirement or other financial goals. You may use appreciated securities from your taxable account and then replace those securities with either the cash you would have used to fund your gifts for that year or cash from the sale of the business or real estate.
Qualified Charitable Distribution (QCDs) From IRAs
The age for required minimum distributions (RMDs) has been delayed to age 73 starting in 2023. However, those physicians who have attained the age of 70 ½ are still able to make qualified charitable distributions (QCDs) from their IRAs. A QCD is a withdrawal from an otherwise taxable IRA whereby the distribution is paid directly to a qualified charity. A QCD may be of an amount up to $100,000 (indexed for inflation starting in 2024) per taxpayer and can satisfy all or part of an individual’s RMD. Note that if the RMD exceeds $100,000, the amount above $100,000 would be taxed as a normal distribution. A QCD is particularly advantageous for those physicians who do not itemize deductions and/or are sensitive to minimizing AGI. The AGI is a key component of determining various thresholds on an individual tax return, so being able to exclude from income up to $100,000—or $200,000 if both spouses use a QCD—of otherwise taxable income may be advantageous depending on individual circumstances. Remember: It is important to know that the IRA custodian does not report that you made a QCD. They only report the total distribution amount from the IRA. For this strategy to reduce your taxable income, you must notify your CPA so it can be reported as a QCD on your tax return. If you have to choose between giving appreciated stock or doing a QCD, consider your long-term goals and portfolio circumstances.
Strategy: A QCD reduces gross income but also reduces the charitable deduction. If you give appreciated securities in any given year and can take a charitable deduction versus using a QCD in that same year, it may not really make any difference in net taxable income for that calendar year. However, when you look at your long-term plan, it can make a significant difference. Under current tax law, your appreciated securities will receive a step-up in basis when you pass away. At the same time, your IRA assets will have income tax consequences to beneficiaries when those funds are withdrawn over the next 10 years after you pass away. With this in mind, QCDs can be a more tax-efficient planning strategy than appreciated securities when considering the longer-term planning.
Strategy: If you want to make a large contribution to a charitable organization for several hundred thousand dollars, make a pledge and take up to the annual limit of $100,000 each from your IRA and/or spouse’s IRA over several years to accomplish your charitable gifting goal while mitigating taxes.
With the opportunities included above as well as with other charitable contributions, it is important to follow specific documentation requirements to appropriately report the deductions and maintain accurate and thorough records. Work with your advisor to select those requirements for the chosen strategy.
As you navigate important year-end decisions, please reach out to a professional at FORVIS to help develop a tax-efficient charitable gifting strategy and assist with any questions.