For many people, the end of the year is a good time to make donations to their favorite charitable causes. Not only does this help charities during the holidays when many families are in need, but it may also yield valuable tax benefits.
Here are four charitable giving strategies to consider between now and the end of the year.
1. Consider “Charitable Bunching”
The idea here is to combine several years’ worth of charitable donations into one year to maximize that year’s deductible contributions. At a minimum, your total annual charitable contributions must exceed the amount of the standard deduction in order for you to benefit from the charitable deduction.
For tax year 2021, the standard deduction for single filers and married couples filing separately is $12,550. For heads of household, the standard deduction is $18,800. And for married couples filing jointly, the standard deduction is $25,100.
Note that a proposal currently being discussed would cap itemized deductions at a 28% marginal tax bracket and reinstitute the 3% Pease limitation on itemized deductions. If these proposals become law and take effect in 2022, this could make charitable giving more valuable this year than next year for high earners.
2. Make Contributions Using a Donor Advised Fund
One way to bunch charitable contributions is use a donor advised fund (DAF). This is a pool of money managed by a charitable organization on behalf of multiple contributors. One of the benefits of a DAF is that you can make contributions now and decide later which charities will receive money from your portion of the fund. The charitable organization handles fund setup and administration in exchange for an annual fee.
DAF contributions are deductible during the year when they’re made, so you have until December 31 to make tax-deductible contributions for this year. Another benefit is that you can pool the resources of different family members and fund a DAF together. This makes donor advised funds a good way to establish a philanthropic family legacy.
3. Donate Appreciated Assets
This strategy may be especially useful for affluent individuals and families in higher tax brackets. Instead of donating cash to the DAF, you would donate assets that have appreciated in value since you obtained them. Investment securities (such as common stock) and real estate are common types of assets used with this strategy.
With a DAF, you will save capital gains taxes that would be due on the asset’s appreciation if you sold it and donated the proceeds to the fund. Meanwhile, the charities will receive the full current value of the asset and you’ll be able to donate and deduct more than your original cost basis.
For example, let’s say you bought a stock 10 years ago for $3,000 and it has appreciated in value to $12,000 today. If you sell it and donate the money to a DAF, you’ll pay $1,800 in capital gains tax, assuming the top 20% tax rate, which leaves just $10,200 for the donation. However, if you transfer the stock to the DAF, you won’t pay any capital gains tax and the DAF will receive the full $12,000 donation. Also, the donation will only cost you $3,000 out of pocket, or the amount you originally paid for the stock.
4. Make a Qualified Charitable Distribution
If you’re over age 70½, you can make a qualified charitable distribution (QCD) of up to $100,000 from your traditional IRA this year. Until recently, QCDs were a temporary provision that had to be renewed every year, but they are now permanent so you no longer have to wait until the end of the year to find out if it will be renewed again.
Using a QCD to make charitable contributions is especially beneficial if you must take required minimum distributions (RMDs) from your traditional IRA. A QCD will satisfy your RMD obligation for this year while also saving you money on taxes and helping you support your favorite charitable causes.
QCDs are not considered taxable income by the IRS, so no taxes are due on the distributions. Making a QCD also enables you to realize tax benefits from charitable contributions without itemizing if the higher standard deduction (see above) means it no longer makes sense for you to itemize.
Start Planning Now
The end of the year is fast approaching so now is the time to think about whether strategies like these could help you support charitable causes and also save on taxes. Be sure to speak with a tax advisor about the details of your specific situation.
