When you think about why you give, it all comes down to one thing—making a difference. But while you are making a difference, oftentimes you can also get a tax benefit. That benefit will depend on several factors–the organization you give to, the property you give and the timing of your gift. That’s why you should think about tax-smart donation strategies. They don’t just save you money on your taxes; they could also help maximize your charitable impact with a bigger donation. Here are a few quick tips to get you started.
Get smart with securities
Before you get out that handy checkbook to send in your donation, take a look at your investment portfolio. If you have long-term appreciated securities (held more than one year), it might make sense to donate those directly to the charity instead of giving cash.
For example, meet Joan and Mark, a married couple who invested $6,000 in securities and earned $4,000 in capital gains, which were reinvested. They now want to use this money to make a generous gift to their favorite charity. They could sell their securities, pay capital gains tax on the $4,000 and write a check to their favorite charity for $9,248; but after crunching the numbers, they see their securities, now valued at $10,000, are more effective when given directly to the charity.
Instead of Joan and Mark paying $752 in capital gains tax (assuming a 15% federal capital gains tax and a 3.8% Net Investment Income Tax (NIIT)), the charity would get $10,000. Plus, Joan and Mark’s income tax deduction would be the full $10,000, increasing their deduction by $752.
In the end, it’s a win-win. Joan and Mark get a bigger tax break, and their favorite charity gets a bigger gift.
Bunch donations to maximize tax-saving potential
The Tax Cuts and Jobs Act of 2017 increased the standard deduction, making it hard for some filers to reach the itemization threshold. This is where "bunching" can help. Bunching is a strategy where you pre-fund multiple years of charitable gifts into the years you intend to itemize. In the off years, you take the standard deduction. This approach requires you to think about your taxes more than one year at a time; however, bunching enhances the likelihood of itemizing your contributions, making it less likely to miss out on the tax benefit that could come with itemizing.
Get flexibility with a donor-advised fund
A donor-advised fund is like a personal fund dedicated to your charitable giving. You donate money to the fund, and it may be eligible for an immediate tax deduction. Your contribution is invested and then, on a time frame that works for you, you can recommend grants to as many 501(c)(3) public charities as you like. Perhaps you want to build your contributions to make a larger gift to a capital campaign at your alma mater in a few years, or maybe you want to make monthly grant recommendations to several charities now. A donor-advised fund gives you that flexibility.
If you decide not to make grants right away, any investment growth is tax free and can help you make more or larger grant recommendations to your favorite charities down the road.
Plus, with a donor-advised fund, you consolidate all your giving and recordkeeping in one place. And, at the end of the year, you receive a single statement listing all your charitable grants. There’s no hunting for receipts during tax time. All the work is done for you.
In a position to consider giving the maximum? Here are more strategies.
Tax law currently offers the opportunity to deduct contributions to a donor-advised fund of up to 60% of your adjusted gross income (AGI) for cash gifts or up to 30% for gifts of long-term appreciated securities. If your giving approaches these totals this year, there are additional ways to maximize the tax benefits of charitable giving.
Give cash and securities. Take advantage of the tax benefits of giving long-term appreciated securities by considering donating up to the maximum 30% of your AGI. Then, consider supplementing the appreciated securities with a gift of cash and qualify for a larger tax deduction. Just make sure your combined cash and securities donations do not exceed 60% of your AGI.
Make a larger gift and carry the deduction forward. If a bonus, inheritance or other unusual event resulted in a dramatic increase in your income this year, under current law you can give more than the IRS limit and use any "excess" deduction to offset income (up to the limits mentioned previously) for as long as five years. You may still get the full benefit but over a multiyear period. Consult your tax advisor to see if this strategy is appropriate for your situation.
Donate your IRA distribution to charity. If you’re 70½ or older and have an IRA, you can direct up to $100,000 per year from your IRA to certain charities. Because it goes straight to charity, the required minimum distribution (RMD) amount is not included in your taxable income. Note that the SECURE Act of 2019 recently increased the age at which RMDs must begin to age 72. If you were 70½ on or before December 31, 2019, then the age for RMDs remains 70½. If your RMDs do not have to begin until age 72, you can still direct funds from your IRA to charity beginning at age 70½, but there may not be an immediate tax benefit to doing so. You should talk to your accountant to determine which charitable giving strategies are most appropriate for your planning.