Smart charitable strategies for 2023

Happy New Year from the Community Foundation!

Not surprisingly, community needs tend to rise during uncertain economic times. As 2023 gets into full swing, inflation, housing challenges, and talk of a recession are pressuring people who are already vulnerable due to financial insecurity, illness, or disability. Nonprofit organizations serving these populations need additional resources—and even more support from charitable giving—to meet the escalating demands. Unfortunately, an economic downturn typically results in not more but less giving because many donors are dealing with fewer financial resources.  

Many families have long understood that tough times are easier to navigate with the help of a solid financial plan. “Have a plan and stick with it” is often viewed as wise advice to ride out economic turbulence. The same can be said for a planned approach to charitable giving. Now is the time for philanthropists and their advisors to think about how much to give and to which organizations in 2023 and evaluate which tax strategies might maximize support to charities while minimizing the impact on donors’ personal financial situations. 

In the spirit of the new year and the resolutions that come with it, we’re sharing tips and ideas in this issue of the newsletter that can help individuals, families, and their advisors develop a thoughtful charitable giving plan to make the best of a tough situation. Indeed, planning is a key theme across all areas of charitable giving, mainly as you help your clients budget for their 2023 donations, adopt a year-round giving strategy, take advantage of the new “Legacy IRA” rules for QCDs, or consider the increased benefits of a charitable gift annuity as interest rates rise. 

As always, the team at the community foundation is here as a sounding board. We’re just a phone call or an email away from helping you work with your clients to map out a budget-conscious, tax-savvy charitable giving plan for 2023 that provides strong support for the local charities that are keeping our community afloat. 

Thank you for the opportunity to work together.
Community Foundation for South Central New York
Celebrating the new Legacy IRA and a boost for QCDs
Congress passed the much-anticipated $1.65 trillion-dollar omnibus spending bill known as the Consolidated Appropriations Act of 2023 (“CAA”) on December 23, 2022, followed by President Biden signing the Act into law on December 29, 2022. At more than 4,000 pages, the Act includes a wide range of provisions that impact multiple sectors.  

Of particular interest to attorneys, accountants, and wealth managers who advise philanthropists are the provisions starting midway through the bill. The bipartisan legislation often referred to as “SECURE 2.0” is included in the CAA legislation. As background, SECURE 2.0’s provisions build on the original SECURE Act of 2019 (“SECURE” stands for “Setting Every Community Up for Retirement Enhancement). SECURE 2.0 includes the Qualified Charitable Distribution (QCD) enhancements that have been in the works for many months.

Here are three key provisions affecting philanthropists in the new law:

  • Taxpayers may now make a one-time $50,000 QCD transfer to a charitable remainder trust (CRT) or other split-interest gift such as a charitable gift annuity (CGA). These are the “Legacy IRA” provisions. Note that the law effectively mandates that the CGA or CRT be created solely for the purpose of receiving a QCD because the new statute requires that the vehicle contain only IRA assets.

  • The required minimum distribution (RMD) age (previously 72) increased to 73 on January 1, 2023. The age will increase to 75 beginning on January 1, 2033. While this provision is not directly tied to charitable giving, it will nonetheless impact your clients’ overall financial plans and potentially affect the timing and strategy of their philanthropy. As a reminder, “required minimum distribution” (RMD) refers to the mandated amount that a taxpayer must withdraw from qualified retirement plans, which include IRAs as well as 401(k)s and other tax-deferred retirement accounts.

  • The annual per-taxpayer $100,000 QCD cap is now slated to be indexed for inflation, which will allow taxpayers to give even more from their IRAs directly to charity.

Here’s what has not changed

  • Eligibility for making a QCD still starts at 70 ½. This allows taxpayers who are not yet required to take IRA distributions under the RMD rules to still take advantage of the QCD technique without the income tax hit on the distributed funds while also removing those funds from liability for future estate taxes.

  • Taxpayers required to take RMDs can still count QCDs toward their RMDs, thereby avoiding the usual income tax hit on RMD dollars.

Valuable conversations- the importance of talking with your clients about charitable giving
Market declines and inflation have made 2022 a more challenging year for some clients to fulfill their traditional giving objectives or early-year gifting intentions. 

With annual inflation hovering at 8% (and no relief in sight) and liquidity perhaps less than ideal, cash may be hard for donors to part with. Giving stock may also be hard to swallow, at least psychologically, in a down market. For example, assume shares of a client’s stock have dropped 15% over the last quarter, from $200 per share to $170. If the client has intended to make a $10,000 gift to charity this year, last quarter, the client could have accomplished that with a gift of 50 shares. However, the client will need to give nearly 59 shares to hit that $10,000 target. Realizing that it will "take more shares to do the same good,” your clients may be less inclined to give depreciated stock shares to their donor-advised funds and other charitable recipients.

So, with money tight and stock perhaps painful to give, your clients may be considering alternatives to cash or securities for their gifts to charity. You and your clients need to be aware of the rules—meaning the IRS’s rules—to both meet the clients’ objectives and stay in Uncle Sam’s good graces. 

A high-level understanding starts with the $5,000 threshold for documentation that appears on IRS Form 8283, titled Noncash Charitable Contributions. This form is required to be filed with any tax return claiming such a deduction. 

Substantiation of value up to $5,000 is routine and consistent with securities (i.e., acquisition and contribution dates, fair market value of the item(s) and method of value determination). Requirements for gifts up to $500 are less stringent. 

Real estate, closely-held stock, art, jewelry, vehicles or baseball card collections, for example, valued at $5,000 or greater require more specifics. They’re also subject to greater scrutiny if the donor is audited or questioned. 

Consider the additional documentation requirements:

–From the donor (your client): the type of gift, description, physical location and a third-party appraisal of value. 
–From the appraiser: a signed declaration on the tax form describing their qualifications and identification number; that they do this work regularly; and where they can be located. 
–From the recipient (the charity, sometimes known as the “donee”): signed confirmation of qualification, receipt, federal identification number and a commitment to document and notify if disposition occurs within three years. (The community foundation is accustomed to filing this documentation for donors' gifts to funds.)

Your clients must also know that meeting the requirements for declaring value rests with them and not their tax preparer, recipient organization or appraiser. In the recent case of Heinrich C. Schweizer v. Commissioner, a donor/taxpayer was found liable for reimbursements and penalties related to a decade-old donation of art first valued at $600,000—later reduced by more than 50%—and exacerbated by the IRS’s determination of participants’ roles and responsibilities. Tax advisors continue to be reminded of the intricate requirements to substantiate hard-to-value gifts such as conservation easements, watching carefully to see how taxpayers can win valuation arguments with the IRS.

So while a high-value donation of real property to your client’s donor-advised at the community foundation or a little-used auto to benefit a charity is admirable and relieves the pressure on making traditional cash or securities gifts, patrons should take a vigilant and “donor beware” approach to alternative gifting. While beauty is in the eye of the beholder, value and deductibility are determined by others. 
The team at the Community Foundation for South Central New York is a resource and sounding board as you serve your philanthropic clients. We understand the charitable side of the equation and are happy to serve as a secondary source as you manage the primary relationship with your clients. This newsletter is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.
Community Foundation for South Central New York | (607) 772-6773