As a result of the Coronavirus pandemic, more individuals are recognizing the needs of charitable organizations and evaluating their ability to make donations to those organizations. Deciding where to donate your hard-earned dollars takes a lot of careful planning. A smart charitable giving strategy considers how, when and what you give. Both your method of giving and the timing of your gifts can help to maximize your impact on favorite charities—while minimizing your tax bite.
Impact of tax reform on charitable giving
While there are many charitable vehicles that can be utilized to accomplish charitable giving during your lifetime, chances are you donate directly to the organizations you care most about.
When you itemize deductions on your income tax return, you can deduct cash gifts you make to charities throughout the year, up to 60% of your adjusted gross income (AGI).1 However, as part of the 2017 tax law changes, the standard deduction amount almost doubled. Now fewer than 10% of taxpayers are likely to itemize their deductions.
If you're among the millions of Americans no longer itemizing deductions, you may be missing out on an income tax benefit from your charitable gifts. And, if you are itemizing deductions, you may not be receiving as large a tax benefit as you enjoyed in previous years.
To help maximize your income tax benefits going forward, here are five charitable giving strategies you might want to consider:
1. If the numbers add up, itemize
To decide if itemizing is the right strategy for you, add up the amount of your allowable itemized deductions, including your home mortgage interest, property/state/local income taxes and other common deductions. If that number is greater than the standard deduction allowed for that year, then itemizing would leave you better off. If not, then it would make more sense to take the standard deduction, which in 2023 is $13,850 for individual taxpayers or $27,700 for married couples filing jointly. For those of you over the age of 65, there’s an additional amount you can deduct—$1,850 if single and $3,000 if married (and both are over 65).
2. Donate stocks or bonds
A simple strategy for boosting your donation—and your tax deduction—is to give stocks, bonds or other appreciated securities directly to your charity of choice. Simply writing a check or giving via credit card may be quick and easy, but cash gifts are typically much less efficient from an income tax perspective. There are a couple of key benefits to giving appreciated assets to charity:
First, if you sell an appreciated security, you may owe capital gains tax on the growth. If, instead, you gift an appreciated security to a charity, you, and the charity, avoid the capital gains tax. In addition, you would be eligible for a charitable income tax deduction equal to the fair market value of the security you donate, up to 30% of your AGI.
Example: John purchased one share of stock in ABC Company years ago when it cost $100 per share. The share is now worth $1,000. If John gives that share of stock to his favorite charity, he will have a $1,000 charitable income tax deduction without recognizing the $900 of capital gain that he would have recognized if he sold the share of stock himself.
3. Consider a qualified charitable distribution (QCD)
If you are taking RMDs, another strategy that can reduce your taxable income is a qualified charitable distribution, or QCD. These are donations made directly from your IRA to your chosen charity. While the gift amount won't qualify for a charitable deduction, it won't be considered taxable income either. This effectively deducts the amount transferred to charity from your taxable income, even if you would not otherwise be itemizing deductions. QCDs count toward satisfying your required minimum distribution (RMD) for the year if it has not already been met. Reducing your taxable income also may be useful for nontax reasons, such as calculating your Medicare premiums. In order to benefit from this strategy, you need to meet a few strict requirements, so make sure you talk to your advisor or accountant first.2
Outside of reducing your taxable income, QCDs may also be beneficial for individuals who will not reach a level of itemized deductions to exceed the standard deduction amount and are still interested in making charitable gifts. If claiming the standard deduction, no charitable tax deduction would be available for the gifts made. The gifts could be made as QCDs thereby reducing the balance of a pre-tax IRA rather than an after-tax account. You can make a QCD once you have reached age 70 ½, but it might make more sense to wait until you have reached age 73. The SECURE Act increased the RMD age from 72 to 73, and because one of the most attractive advantages of the QCD is reducing your taxable income by offsetting your RMD amount, it might be more beneficial to wait until you have to take RMDs (at age 73). Regardless of your situation, QCDs remain a very attractive strategy that you will want to keep in your back pocket for future years.
Example: Sally has an IRA with a $10,000 RMD. She directs $1,000 from her IRA to her favorite charity and takes the remaining $9,000 RMD. On her income tax return, she will report only $9,000 of taxable distributions from this retirement account.
4. Bunch your charitable gifts
As a way to make your itemized deductions exceed the standard deduction threshold—and ultimately reduce your tax bill—you might consider "bunching" or prefunding your charitable gifts into one tax year. Taxpayers often bunch in this way by donating appreciated securities.
Example: Jack and Dianne are both age 60. They typically give $10,000 per year to charity. Their standard deduction for 2023 is $27,700. The only other itemized deduction available is the $10,000 state and local income tax deduction. If Jack and Dianne gave $10,000 to charity this year, they would not receive an income tax deduction (because the standard deduction is higher). They could, however, make three years' worth of gifts this year and their itemized deductions would total $40,000 ($30,000 charitable donations plus $10,000 state and local income tax deduction).
5. Consider a donor-advised fund (DAF)
Did you know that you can create your own personal charitable giving fund? A donor-advised fund is itself a charitable entity, and a key benefit is its flexibility. Funding a DAF allows you to claim an immediate charitable tax deduction—and then recommend when to distribute the money to your favorite charities, on a timetable that works for you. While you decide how best to bestow financial support, the funds in your DAF are invested and have the potential to grow. Any growth is tax free—enabling you to give even more to the causes close to your heart. For an even greater tax benefit, you can fund your DAF with appreciated securities rather than cash.
In the example above, Jack and Dianne could make the $30,000 gift to their donor-advised fund and benefit from the charitable income tax deduction this year. They could then distribute $10,000 to charities annually from the donor-advised fund, thereby maintaining their accustomed pattern of giving.
Deciding which strategy is right for you
While there is no "one size fits all" strategy for charitable giving, choosing between cash, appreciated securities and qualified charitable distributions will depend on a number of personal factors, including your age, portfolio and how much you are willing or able to give.
Charitable giving can easily become complex. Make sure to talk to your TIAA advisor, as well as your tax advisor, before deciding on your giving plan. We can help you better understand these five tax-savvy strategies and review your options.