Optimizing charitable giving from a tax perspective involves strategic planning to maximize the tax benefits of your donations while supporting causes that are important to you. Here are key strategies to consider:
- Understand Tax-Deductible Donations
- Eligible Charities: Ensure your donations go to organizations that qualify for tax-deductible contributions under IRS guidelines, typically 501(c)(3) organizations. This includes many nonprofit organizations, religious institutions, and educational institutions.
- Itemizing Deductions: To claim charitable contributions as a tax deduction, you must itemize your deductions on your tax return using Schedule A (Form 1040). This is only beneficial if your total itemized deductions exceed the standard deduction.
- Strategic Timing and Bunching Contributions
- Bunching Strategy: If your charitable contributions do not exceed the standard deduction, consider “bunching” your donations. This involves making multiple years’ worth of donations in a single year to exceed the standard deduction threshold, allowing you to itemize your deductions for that year.
- Year-End Donations: Donations made by December 31 of the tax year count toward that year’s tax return. Planning your donations toward the end of the year can help you better estimate your taxable income and optimize deductions.
- Donate Appreciated Assets
- Stocks and Other Securities: Donating appreciated securities directly to a charity can provide a double tax benefit: a deduction for the full market value of the asset and avoidance of capital gains tax on the appreciation. This is particularly advantageous if the asset has appreciated significantly since purchase.
- Qualified Charities: Make sure the charity is set up to accept stock donations and is a 501(c)(3) organization to ensure you receive the full tax benefits.
- Qualified Charitable Distributions (QCDs)
- IRA Contributions: If you are 70½ or older, you can make a Qualified Charitable Distribution (QCD) directly from your IRA to a charity. QCDs count toward your Required Minimum Distributions (RMDs) but are not included in your taxable income, providing a tax-efficient way to give.
- Annual Limits: QCDs are limited to $100,000 per year per individual, and you cannot also claim a charitable deduction for the QCD amount.
- Understand Limits on Charitable Deductions
- Cash Donations: For cash contributions, you can generally deduct up to 60% of your Adjusted Gross Income (AGI) if you itemize. If you exceed this limit, you can carry forward the excess contribution for up to five years.
- Non-Cash Donations: Deductions for donations of appreciated securities are typically limited to 30% of your AGI. Contributions of other types of property may have different limits.
- Keep Detailed Records and Documentation
- Receipt Requirements: To claim a charitable deduction, you must have documentation for your contributions. For cash donations, this includes bank statements, credit card statements, or written communication from the charity. For donations over $250, you must have a written acknowledgment from the charity.
- Non-Cash Contributions: If you donate non-cash items valued over $500, you need to file IRS Form 8283. For donations of property valued over $5,000, a qualified appraisal is required.
- Consider Estate Planning and Legacy Giving
- Bequests and Charitable Trusts: Including charitable donations in your estate plan can reduce estate taxes. Charitable remainder trusts or charitable lead trusts allow you to give to charity while providing for your beneficiaries.
- Beneficiary Designations: Designate a charity as a beneficiary of your retirement accounts or life insurance policies. This can reduce the taxable amount of your estate while supporting your favorite causes.
By employing these strategies, you can optimize your charitable giving to maximize both the impact of your donations and the associated tax benefits. Always consult with a tax advisor or financial planner to tailor these strategies to your specific financial situation and ensure compliance with current tax laws.
Nicole Mulvihill
Director of Investor Relations
LPL Registered Administrative Associate
Sources: https://www.irs.gov/charities-non-profits/charitable-organizations
https:/www.fidelitycharitable.org/guidance/charitable-tax-strategies/charitable-contributions.html
Disclosures: All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.