Charitable giving frequently conjures up images of the ultra-rich establishing foundations and complex trusts. While this is undoubtedly true, many people who do not have millions of dollars regularly contribute to the causes they support.
It is also worth noting that this article will concentrate on income tax benefits rather than estate tax benefits. The latter is usually only applicable to people worth millions of dollars.
You wouldn’t normally give money just to get a tax break. However, if you’re going to give, you might as well get the biggest tax break possible.
Traditionally, these benefits have been obtained by itemizing deductions on your federal tax return. Because the standard deduction is now so much higher thanks to the Tax Cuts and Jobs Act of 2017, fewer people itemize their deductions.
However, there are some smart moves you can make to reduce your taxes when donating to causes you care about.
There are exceptions (and even exceptions to the exceptions!) as with most things in the tax code. As a result, it’s critical to speak with a qualified tax advisor about your specific situation.
“Bunching” Itemized Deductions
Many of you probably no longer itemize, but you’re getting close. If this is the case, “bunching” two years’ worth of donations into one year every other year may make sense.
This should allow you to itemize one year and take the standard deduction the next, resulting in a slightly higher deduction amount over the course of each two-year cycle.
A Donor Advised Fund (DAF) allows you to contribute money to it and receive a full charitable deduction in the year you make the contribution, but the money is distributed to a qualifying charity over time. This can be used in conjunction with the bunching strategy to ensure that your causes continue to receive funds on the same schedule as before.
This can also be used as a stand-alone strategy, especially if you have a high-tax year. A large contribution would lower your taxes that year, and the funds could be used for several years of giving.
Contribution to a Qualified Charity
This could be the best deal in the tax code, but you must be over the age of 70.5. Once you are, you can make a direct contribution to a qualifying charity from your IRA. Those funds would be excluded from your tax return, which can also help you avoid other AGI thresholds.
Make sure to coordinate this strategy with any Traditional IRA contributions, as there is no longer an age limit on contributions as a result of the SECURE Act, which was passed in December 2019.
Donate Appreciated Securities in Kind
In-kind donations are for those of you who have non-retirement account investments. If you sell a security for a profit, you may be subject to capital gains tax. Because of its tax-exempt status, a charity will not owe any tax if it sells a security for a profit.
This opens up the possibility of donating appreciated securities ‘in-kind.’ If you itemize, you will be able to deduct the entire amount. Even if you don’t itemize, you can still benefit from this strategy.
The money you would have given can be used to repurchase the donated security, resetting your basis. This would reduce your potential future capital gains.
IRA Charitable Beneficiary
If you want to leave money to a charity and your heirs after you die, consider leaving a portion of your pre-tax retirement accounts, such as IRAs and 401ks, to the charitable portion.
Your heirs would be taxed on withdrawals from pre-tax accounts, but charities would not be taxed on those withdrawals due to their tax-exempt status. To avoid any unintended consequences for your heirs, you should definitely run this type of thing by a qualified professional.
Hopefully, one of these strategies will assist you in reaping the benefits of the charitable contributions you are already making.