July 10, 2024
Give, Save, & Prosper: Reducing Taxes With Charitable Donations
by Graham F. Shepherd, CFP®
Give, Save, and Prosper: Reducing Taxes with Charitable Donations
Charitable donations can have a big impact on both your community and your wallet. By making strategic donations, you can support causes you care about while also benefiting from tax deductions. Here’s an overview of how to make the most of your charitable giving.
The Basics of Charitable Donations
When you donate to a qualified charity, you can often deduct those donations from your taxable income, potentially reducing the amount you owe to the IRS.
To take advantage of the tax benefits, however, you will need to itemize deductions on your tax return instead of taking the standard deduction. This involves listing all of your deductible expenses, including charitable donations, mortgage interest, and medical expenses. If the total exceeds the standard deduction, you'll pay less in taxes.
It's essential to keep accurate records of your donations. Save receipts and acknowledgment letters from the charities to provide proof to the IRS if needed.
Different Ways to Give
Donating Cash: Cash donations are straightforward and include money given by check, credit card, or actual cash. You can typically deduct up to 60% of your adjusted gross income (AGI) with cash donations, with a five-year carry-forward for unused deductions.
Donating Goods: You can also donate items like clothing, furniture, or vehicles, provided they are in good condition. The value of these items can be deducted from your taxes. For large donations, a qualified appraisal might be required.
Donating Stock: Donating appreciated stocks, mutual funds, real estate, or other securities can provide a double benefit: you avoid paying capital gains tax on the appreciation and get a deduction for the full market value of the stock, up to 30% of adjusted gross income (AGI). There is a five-year carry-forward deduction on gifts that exceed this AGI limit. This can also be a tax-efficient way to reduce a large position in a portfolio.
Donating Life Insurance: Donating a life insurance policy can be a straightforward way for donors to make a substantial future gift to a charity at a relatively low current cost, especially if the policy is already paid up. You can donate by transferring ownership or changing the beneficiary of an existing life insurance policy to a charity. If a donor transfers ownership, they can claim a charitable deduction for the policy's fair market value or the cost basis, whichever is less. In addition, the donor can elect to continue paying the premiums, which may be tax-deductible as charitable donations. Finally, if the charity is named as the beneficiary, the policy's death benefit is removed from the donor’s estate, potentially reducing estate taxes.
Qualified Charitable Distributions (QCDs): If you’re 70½ or older, you can make a QCD from your IRA, donating up to $105,000 (2024) directly to a charity without it being counted as taxable income. This is an excellent way to meet your required minimum distribution (RMD) while gaining a tax break.
Strategies to Maximize Your Tax Savings
To get the most benefit from your charitable donations, consider these strategies:
Bunching Deductions: If your itemized deductions are below the standard deduction, you will not get a tax ‘benefit’ for your charitable intent. (For instance, the standard deduction in 2024 for married couples is $29,200. If your itemized deductions less donations equal $15,000, then the first $14,200 of gifts do not increase your deduction.) If your cash flow allows, you can bunch your donations by making two or more years' worth of donations in one year. This allows you to exceed the standard deduction threshold in that year and take the standard deduction in the other years.
Employer Matching: Check if your employer offers matching gifts. Some companies will match their employees’ charitable donations, doubling your impact and your deduction potential.
Timing Your Donations: Ensure donations are made before December 31st to count for the current tax year. For large donations, consider your income and deductions for the current and future years to optimize the tax benefit. Large donations can also be coordinated with large taxable distributions from tax-advantaged accounts (such as a Roth conversion) to offset tax liability.
Using Appreciated Assets: Donate stocks or other appreciated assets held for more than a year. This helps avoid capital gains taxes and provides a deduction for the current market value (up to 30% of your AGI).
Setting Up a Donor-Advised Fund (DAF): A DAF is like a charitable investment account. You contribute money, receive an immediate tax deduction, and then recommend grants to charities over time. If you anticipate a high-income year, contributing to a DAF can maximize your deduction now while allowing you to decide on the beneficiaries later.
Gift Tax Exclusions and Limits
In addition to charitable donations, it is important to consider the potential tax impact of making gifts to individuals. The IRS allows you to give up to $18,000 (2024) per person per year without paying any gift tax, known as the annual gift tax exclusion. Married couples can combine their exclusions to gift $36,000 per person per year.
If you exceed these amounts in a given year, you will need to file a gift tax return. However, you likely won’t owe taxes thanks to the lifetime gift and estate tax exemption, which is $13.61 million for Single filers and $27.22 million for married couples (2024). This means you can give away a substantial amount over your lifetime before having to pay gift taxes.
Here's a quick summary of important figures related to charitable giving and taxes:
Taking Action
We frequently help our clients strategically allocate assets to support philanthropic causes they care about. This has included planning and executing donations during a client’s lifetime to charitable organizations or vehicles such as donor-advised funds and charitable trusts. By incorporating – and combining – charitable gifting strategies into their financial plans, individuals can leave a lasting legacy while potentially reducing their tax burden.
If you would like to learn more about how these strategies might fit into your financial plan, please reach out to your Armor team!.