2023 Guide to Year-End Charitable Giving
If you're wondering "can I write off this donation on my taxes?" this Q&A with financial planner Cody Lachner can help you navigate some of the basics of year-end charitable giving.
The end of the year is a prime time for nonprofits to send their annual appeals and ask donors to reach into their pockets one last time before the end of the year to help them meet their fundraising goals. This is an opportune time because it also coincides with the end of the tax year when – for certain people – making charitable donations can help reduce their taxable income and the amount they owe in state and federal taxes. I’m a graphic designer, so obviously this is not my area of expertise. To help answer some of my own questions, I’ve brought in financial expert Cody Lachner to clear the air on some common misconceptions on donations as tax write-offs. If you’re considering making some big donations before the end of the year, check out my interview with Cody and speak with your accountant to make sure you have all of the facts. If you’re a nonprofit, these simplified explanations could prove to be helpful when communicating year-end giving benefits to your donors!
Now let’s dive in! Here’s my Q&A with Cody about Year-End Charitable Giving:
MARGO: Will making donations to a nonprofit organization reduce the amount of tax I owe to the IRS? How much do I need to donate to reduce the amount of tax I owe?
CODY: In general, your primary purpose for donating to a nonprofit organization should be to support a cause you care about with tax benefits being secondary. Whether or not charitable donations can benefit you come April 15th depends on whether or not you take the standard deduction. In 2023 the standard deduction for couples is $27,700 and $13,850 for those filing as single. If your deductions don’t exceed these standard deductions, it won’t make a difference on your taxes if you donate $200 or $2,000. If you exceed the standard deduction amounts, your contributions can itemize on your Schedule A tax form and could help reduce the amount of tax owed.
MARGO: How do I decide which nonprofit organizations to donate to? How do I know if a nonprofit is a 501(c)3 and if my donation to an organization is tax deductible.
CODY: I always suggest finding nonprofit organizations aligned with your personal values and goals, ones that support what’s important to you. There are literally thousands of nonprofit organizations doing great work for climate change, environmental, health, humanitarian, wildlife and education issues.
Sites like Charity Navigator, BBB’s Give.org and The IRS's Tax Exempt Organization Search Tool can help you search for nonprofits, see ratings and check if a nonprofit is a 501(c)3 and eligible to receive tax-deductible donations. While understanding how and where money is spent can feel like a good indicator of how donation dollars are spent, keep in mind that this isn’t always a straightforward way to vet a nonprofit organization – fundraising, marketing and qualified staff can often get overlooked and seen as overspending when, in fact, they should be seen as smart investments by the org to increase revenue that goes back into programs. If you’re concerned about whether or not a nonprofit organization is legit, you can check their Form 990 which reports all income and expenses, an inconsistent Form 990 could be a red flag!
Tip: Check out the documentary Uncharitable to get the big picture on both sides of nonprofit spending and see some interesting case studies of how the media has negatively influenced the public to believe that nonprofits shouldn’t spend money on fundraising or salaries.
MARGO: After I make a donation, what’s the best way to document it or show “proof” to the IRS of my donation?
CODY: The IRS wants to see a bank record or credit card statement showing that you made a donation. You should also obtain documentation from the charity with the date that the donation was received and the dollar amount of the donation. Even if you’re taking a standard deduction and don’t need to itemize the donation, it’s important to still maintain this documentation for your records for up to three years.
MARGO: How are donations handled differently for 1099/gig workers vs. W2/full time employees vs. Corporations (S Corp, C Corp, etc)?
Tax write-offs are confusing, chat with your CPA or Financial Advisor for professional advice. Photo: Isaac Miller Photography
CODY: In the case of LLCs taxed as S Corps or Sole Proprietors, W-2 employees or 1099 workers, your charitable contributions all flow through to your personal tax returns. In any of these situations, your charitable contributions may count towards your deductions if you have enough itemized deductions to exceed your standard deduction.
C Corps can take deductions for charitable giving. Up to 10% of taxable income can be deducted as a charitable contribution.
MARGO: If an employer matches an employee's contribution, does the employee write off the amount they donated or the full matched amount?
CODY: The employee can only write off the amount they donated and cannot claim the amount the employer matched. The employer can deduct the amount they contributed to the match (this is dependent on how the entity is structured). Example, if an employee donates $100 to a nonprofit organization and their employer donates $100 for a total contribution of $200, each party can only deduct the amount they gave.
MARGO: For our seasoned donors, let’s talk about some strategic tax planning of donations.
CODY: Strategic tax planning can be great for individuals able to make larger contributions every year and want to maximize their benefits. Here are some common ways individuals can do tax planning and savings:
Charitable Bunching. This is an option if you’re giving a lot each year but still not able to meet the threshold for a standard deduction. Bunching can help meet the threshold for the standard deduction by choosing to take the standard deduction every other year and making larger donations on the other. For example, if someone regularly gives $20k/year and takes standard deduction, they could do “charitable bunching” by combining two years on charitable contributions, $40k, into one year to increase their total allowable deductions. Bunching can also help reduce taxes if you experience a higher-than-usual income year.
Donor Advised Funds (DAF). With a DAF, individuals can contribute cash or investments to a special account dedicated for charitable giving and control when and where donations are made. Tax deductions are taken when the contribution is made to the DAF, not when the DAF funds are distributed. This is a useful approach for people who have specific tax planning objectives for the current year. For example, someone gets a large bonus from work and would like to open a DAF and dedicate $30k for charitable giving, over the course of a few years, they distribute the funds to several nonprofit organizations of their choice.They’re able to claim a deduction in the year of donation (as long as they meet the threshold to deduct) even though they may not actually send the donations to the charities until a later date.
Qualified Charitable Distribution (QCD). QCD’s are dedicated for those 70.5 years (yes, 70 and a half!) and older who have an IRA. QCD’s take money from an IRA and send it directly to the eligible nonprofit of your choice. With this method, the donation is not considered a deduction, the amount is simply excluded from your income. The donor doesn’t handle the money or write a check, the funds are directly wired to the organization. This could benefit individuals to reduce their taxable income after age 75 when it’s required to take money out of IRA.
Investment Accounts. People with taxable investment accounts have the ability to donate appreciated investments directly to their favorite charity. Doing so helps the donor avoid capital gains taxes and the charity would also not owe any capital gains when they eventually sell the investments to support their cause. If a person has a taxable investment account and regularly gives cash to charity, it can often be more efficient to give appreciated investments and reinvest the cash that would’ve been donated back into the investment account. Doing so helps establish a higher “cost basis” within the account, thus helping reduce future capital gains.
Many larger nonprofit organizations have in-house advisors dedicated to help with planned giving
DISCLAIMER: This information is intended to be educational. They are not specific tax, legal or investment advice. Before considering acting on any of this information, first consult with your tax, legal or investment advisor. While the information expressed is believed to be accurate, neither Cody Lachner, CFP®, EA nor Next Adventure Financial LLC nor High Mountain Creative LLC make any guarantees to its accuracy.
I’m Cody Lachner, a virtual financial planner helping outdoor enthusiasts confidently retire to a life built around their passions. I build each family their own financial map that helps them safely spend & enjoy their wealth, reduce taxes, and do more of what they love. Check out my website to learn more.
I’m Margo! A graphic designer who works with conservation-minded nonprofits and brands on projects like logos & branding, annual reports, maps, and infographics. I work with my clients to create beautiful and meaningful design that amplifies the marketing efforts it takes to ignite action and change. Visit my portfolio to see some of the projects I’ve collaborated on with nonprofits to protect the environment.
