Charitable Giving and Education Savings in 2023

For 2023, donors may claim a tax deduction for contributions of cash of up to 60% (for non-cash assets held more than one year up to 30%) of one’s AGI.

Charitable Giving

Donation amounts in excess of these limits may be carried over for up to five tax years. For example, consider an individual who has $10 million of AGI and makes a $10 million cash contribution in 2023. The income tax deduction will be limited to $6,000,000, and $4,000,000 of the charitable contribution can be carried forward for the next five tax years.

In addition, some donors may find that the total of their itemized deductions for 2023 will be slightly below the level of their standard deduction. In that circumstance, it could be beneficial to combine or “bunch” 2023 and 2024 charitable contributions into one year (2023), itemize deductions on their 2023 tax returns, and take the standard deduction on the 2024 tax returns.

In addition to achieving a large charitable impact in 2023, this strategy could produce a larger two-year deduction than two separate years of itemized deductions, depending on income level, tax filing status, and contribution amounts each year. With proper planning, there is still time left in 2023 to take advantage of this benefit and aggregate contributions.

2023 Year-End Tax Planning Resources

Withum’s Year-End Tax Planning Resource Center is a one-stop-shop for annual tax planning tips for individuals and businesses, legislative and regulatory changes and other tax-saving opportunities.

Education Savings and Credits

Raising children and helping them pursue their educational goals can be highly rewarding but extremely expensive. Fortunately, there are several tax breaks that can offset some of these costs.

529 Plans

If you’re saving for education expenses, consider a 529 plan (names for section 529 of the Internal Revenue Code). These tax-advantaged plans—sponsored by states, state agencies, and educational institutions—are investment accounts that offer tax benefits when the money is spent on qualified education expenses for the beneficiary.

Unlike other tax-advantaged accounts, there is no limit on contributions to 529 plans. States can and typically do set their own limits, with a maximum contribution limit that ranges between $235,000 and $529,000.

Once invested, money in a 529 plan grows tax-deferred and is not subject to federal income tax when applied toward qualified education expenses. Contributions are not deductible from federal income taxes, but some states offer tax deductions or tax credits on 529 plan contributions.

Note that contributions may trigger gift tax consequences if you earmark more than the gift tax exclusion ($17,000 for 2023) for any one beneficiary in a tax year, though individuals can elect to contribute up to 5 years of gifts (i.e., $85,000) to a 529 plan in 2023 and treat the contribution as if it were spread over a 5-year period for gift-tax purposes.

In addition, starting in 2024, unused money from a 529 plan can be rolled over on a tax-free basis to a Roth IRA established in the name of the beneficiary. Among other limitations, the 529 plan must have been open for 15 years and the account holders cannot roll over contributions made in the last five years. Rollovers are subject to the annual Roth IRA contribution limit, and there’s a $35,000 lifetime cap on 529-to-Roth transfers.

ESAs Coverdell Education Savings Accounts

These accounts are similar to 529 plans in that contributions are not deductible for federal purposes, but plan assets can grow tax-deferred, and—distributions used to pay qualified education expenses without the imposition of income tax. In addition, you choose how to invest the money in the account, typically on behalf of the beneficiary.

Unlike 529 plans, there is an income eligibility limit and a relatively low limit on contributions. The annual maximum is $2,000 per beneficiary and less for higher earners—which means if you (as a parent) contribute all $2,000, grandparents and other individuals are not allowed to make additional contributions to the account during the year.

ESAs are worth considering if you would like to have direct control over how your contributions are invested or if you want to pay elementary or secondary school expenses in excess of $10,000. Note as well that your child can be the beneficiary of both a 529 plan and an ESA, and you can contribute to both accounts in the same year.

American Opportunity Credit

This tax break covers 100% of the first $2,000 of tuition and related expenses and 25% of the next $2,000 of expenses. The maximum credit per student is $2,500 per year for the first four years of post-secondary education.

Lifetime Learning Credit

If you are paying post-secondary education expenses beyond the first four years, you may benefit from the Lifetime Learning credit (up to $2,000 per tax return).

HSAs and FSAs

Health savings accounts (HSAs) and flexible spending accounts (FSAs) are programs with tax benefits that you can use to save on health care costs.

HSAs: If you provide employees with a qualified high-deductible health plan (which typically has lower premiums/plan contributions and higher deductibles than a traditional health plan), you can also offer them an HSA.

HSAs are an elective benefit that an employer can offer as a way for employees to set aside tax-advantaged medical savings to pay for copays, deductibles, and other qualified medical expenses. The HSA works much like a standard checking account (often including a debit card), and it is up to the employee to track their contributions, expenses, and reimbursements.

Note that contributions to an HSA are limited to $3,850 for self-only coverage and $7,750 for family coverage in 2023, and $4,150 for individual coverage and $8,300 for family coverage in 2024.

FSAs: An FSA is another type of employer-established plan that pays for qualified medical expenses but with pre-tax dollars. Employers and employees may both contribute to the FSA, and an FSA is not limited to high-deductible plans like an HSA.

Unlike an HSA, funds in an FSA are subject to an annual use-it-or-lose-it rule, meaning any funds that are unspent by the end of each plan year are forfeited to the account holder’s employer.

The FSA contribution limit is $3,050 per person in 2023 and $3,200 in 2024.

Contact Us

Reach out to Withum’s Tax Services Team to discuss your individual charitable contributions as year-end approaches.

Disclaimer: No action should be taken without advice from a member of Withum’s Tax Services Team because tax law changes frequently, which can have a significant impact on this guide and your specific planning possibilities.