Year End Charitable Giving Tips
At this time of year, many of us find ourselves in the spirit of gratitude and giving. Appropriately, it is a season for charitable giving as well. Nonprofits and other charitable foundations rely on thoughtful contributions at year’s end. Trends like #GivingTuesday have put a contemporary spin on year-end giving. Here we offer some year-end charitable giving tips to help make your season’s donations a bit smarter.
Year-end charitable giving tips to make your donations smarter
By making your gifts before December 31, you can take advantage of several tax incentives. While it may be easiest to write a check or drop some cash in the “Santa” bucket outside the grocery store, some year-end charitable giving deserves a different approach.
Smarter options include making donations in the forms of stock or other assets, or from particular accounts. These options increase the value of your gift (thus benefiting the charities of your choice) and offer tax benefits. With these strategies, more of your money goes straight to the organizations you care about without Uncle Sam taking a cut.
Year-end charitable giving tip #1: Gift appreciated assets rather than cash
In many cases, you can make your year-end charitable giving in the form of an appreciated asset. If you’ve held stock for more than one year that is at a gain, you can donate it directly to charity to avoid paying a capital gains tax. (That is, the tax an investor usually pays when he or she sells the asset. The amount depends on how much the asset appreciated during the time the investor held it.) The charity can turn around and sell the stock, but they are not subject to the capital gains tax due to their 501(c)(3) status. By gifting such assets to a nonprofit organization, you pay less tax and give more to the charity. This makes it a more beneficial gift than cash for you and the organization you’re helping.
Year-end charitable giving tip #2: Consider a Donor Advised Fund
A donor-advised fund (or DAF) is a charitable giving account that allows donors to enjoy tax benefits and administrative ease while supporting charitable organizations. Donors can contribute stock or cash to the accounts, then pass it along to the charities of their choice now or in the future. Since the disbursement to the charity does not have to be made in the same year you make the DAF contribution, funds can be invested within the DAF. In fact, you can make a donation to the DAF, receive a tax benefit in the current year, then gift it to charities in future years while your donation grows in the meantime.
Year-end charitable giving tip #3: Charitable bunching
Another year-end charitable giving tip involves strategizing the timing of your contributions. Here’s a quick breakdown of what your tax deductions can look like:
- When you file your taxes, you either take the “standard deduction” or an “itemized deduction.”
- If you have enough “itemized deductions” to exceed the amount of the “standard deduction,” you can claim a deduction for more than the standard default deduction.
- Charitable gifts are one component of the itemized deduction calculation.
- However, many people don’t have enough “itemized deductions” to exceed the “standard deduction” amount.
So, what to do? You can use a strategy called “charitable bunching” to help you reach the threshold for itemized deductions. In short, you make multiple years’ worth of charitable contributions in one year to increase your itemized deduction total. You still make the charitable gifts you care about. But adjusting the timing of the gifts allows you to take the itemized deduction when you file your annual taxes.
Year-end charitable giving tip #4: Donate cash for the sale of assets at a loss
Toward the end of each calendar year, many investors take time to review their portfolios for investments currently at a loss. Those investments can then be sold and reported as a loss to the IRS. The losses can then offset other capital gains and up to $3,000 of ordinary income. You can turn the tax benefits earned from this process (known as tax-loss harvesting) into a cash donation to charity. This isn’t a strategy to use every year; after all, you make most investments with the intention of riding out a short-term loss for long-term gain. But selling losses when it makes sense financially is one way to boost your year-end charitable giving.
Year-end charitable giving tip #5: Give from your IRA (Individual Retirement Accounts) to charity
If you are 70.5 or older, you can donate to charity from your IRA. This is called a Qualified Charitable Distribution (QCD), and these donations are not taxable. If you are age 72 or older and are subject to Required Minimum Distributions (RMDs), your QCDs can be used to meet your RMD amount. Making your year-end charitable giving in this way ultimately reduces your income taxes. Everyone benefits.
As you reflect on the nonprofits and other organizations you would like to support, keep these year-end charitable giving tips in mind. With a little strategy, you can give even more to the causes you care about.
If you need help navigating how to utilize tax benefits and other strategies to boost your charitable giving, our team at Commas can help.
Commas is a wholly-owned subsidiary of Truepoint Inc., a fee-only Registered Investment Adviser (RIA). Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A and Form CRS filed with the SEC, can be found at www.usecommas.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice.