If charitable giving is important to you, you may be motivated by several goals. Perhaps you’re supporting a cause you’re passionate about, giving back to a school or other organization that contributed to your success, or honoring a loved one’s memory. Typically, tax breaks for charitable donations are not, by themselves, the top motivating factor. But taxes are an important consideration, partly because they may affect how much you choose to give.
Here are five tax strategies for enhancing the tax benefits of your charitable gifts.
Make the most of itemized deductions. To deduct charitable gifts, you must itemize, but recent tax law changes reduced the number of people who will choose to itemize. The Tax Cuts and Jobs Act (TCJA) nearly doubled the standard deduction to $12,200 ($24,400 for joint filers). It also capped deductions for state and local income and property taxes at $10,000, and limited deductions for interest on certain mortgages and home equity debt. If your total itemized deductions are less than the $12,200 or $24,400 threshold, you’ll likely claim the standard deduction and your charitable gifts will provide no tax benefits absent some additional planning.
For instance, one effective strategy for maximizing your deductions is to “bunch” your charitable gifts into alternating years. Here’s how that works: Suppose Donnie and Connie, a married couple filing jointly, have itemized deductions totaling $20,000 per year. The deductions consist of $10,000 in state income and property taxes and $10,000 in charitable donations. (Their mortgage is paid off, so they have no deductible interest expense.) Because the couple’s itemized deductions are less than $24,400, they’re better off taking the standard deduction.
Donnie and Connie can increase their deductions if, instead of donating $10,000 per year to charity, they donate $20,000 every other year. That way, they’re able to claim $30,000 in itemized deductions one year and the $24,400 standard deduction the following year. Their expenses for the two-year period still total $40,000, but they increase their deductions for the period from $48,800 to $54,400.
Open a donor-advised fund. Bunching charitable donations can help you maximize your tax benefits, but the timing may not be ideal for the charities that receive them. One way around this problem is to use a donor-advised fund (DAF), a charitable investment account to which you make tax-deductible contributions. A properly structured DAF allows you to bunch your charitable deductions into alternating years while requesting the fund sponsor to distribute funds to your charitable beneficiaries evenly over time.
Donate cash. Even if you itemize, your charitable deductions are limited to a percentage of your “contribution base” — generally, your adjusted gross income (AGI). Cash gifts to public charities are currently deductible up to 60% of the contribution base, while noncash gifts are usually subject to a 30% limit. (Contributions more than those limits may be carried forward up to five years.) If income limits come into play, you may be able to maximize your deductions by donating cash.
Donate appreciated assets. Despite lower deduction limits, donating appreciated stock or other assets to charity may provide attractive tax benefits. For example, if you sell appreciated stock and donate the proceeds to charity, you’ll owe capital gains taxes on your profits. But if you donate the stock directly to a charity, you’ll avoid those taxes. Plus, you’ll enjoy these savings even if you’re unable to deduct the value of your gift (because you don’t itemize, for example).
Do a charitable “rollover.” If you’re 70½ or older, consider a qualified charitable distribution (QCD) from your traditional IRA to charity. A QCD allows you to transfer up to $100,000 tax-free directly from an IRA to a qualified public charity and to apply it toward your required minimum distribution for the year. The advantage of a QCD is that the distribution is excluded from your AGI, allowing you to avoid the tax even if you don’t itemize.
As you review your philanthropic plans, be sure to consider the tax implications of your charitable gifts and strategies for reducing those costs. Tax savings may not be the reason you give, but they can provide an incentive to give more. You have until December 31, 2019, to make a donation that could affect your 2019 tax year.